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Article Archive: 2007 Third Avenue Q4 2007 12/29/07   Whitman "The mortgage meltdown-housing collapse seems nothing new for the U.S. economy. During the last 60 years, virtually every sector of the American economy has gone through depressions as bad as anything that occurred in the 1930s. Remember the melt-downs during the past 40 years for, inter alia energy, banks, real estate, savings & loans, Wall Street brokerages, row crops, steel, automobiles, machine tools, etc. Unlike the 1930s, all these depressions occurred without domino effect. The probability seems to be that the next ten years in the U.S. will be more like the last 40 than they will be like the 1930s. Put otherwise, the odds favor overcoming the current crisis in residential housing and residential housing finance without underlying damage to the U.S. economy." Buffett starts up bond insurer 12/28/07   Buffett "Buffett, who has described derivatives as 'financial weapons of mass destruction,' told the Journal he will focus on insuring municipal debt rather than CDOs." 5 Graham Stocks for 2008 12/28/07   Stingy Investing "Over the past seven years I've used my take on Benjamin Graham's time-tested strategy for defensive investors to uncover undervalued U.S. stocks. I'm pleased to say that the overall results have been stellar and last year's numbers were outstanding. The performance of each year's Graham stocks, the performance of the S&P500 (as tracked by the SPY exchange-traded fund), and the difference between the two is shown in Table 1. You can see that the Graham stocks have beaten the S&P500 in six of the last seven years and often by a substantial margin. An investor who bought each year's Graham stocks, sold, and then bought the next crop of stocks would have gained 507% (or 32% annually**) whereas a buy and hold investment in SPY units would have gained only 22%." Value that sizzles 12/27/07   Stingy Investing "I bought into Fairfax Financial when it was hit by a tsunami of bad news in 2002. Short sellers were betting it would collapse - which is one reason I thought it was a buy. I like beaten-down stocks because I'm a contrarian and a value investor. I think that desperate situations such as Fairfax in 2002 are the ones that hold the potential for the biggest profits. Most people, though, hesitate to wager a big chunk of their hard-earned money on distressed stocks - and for understandable reasons. One problem with investing in companies like Fairfax is that you may have to wait years to see a profit. Another problem with deep-value investing is that it's not at all unusual to buy into a beaten-down firm, then watch it get even more beaten up. This can be deeply stressful. A good way to sidestep these problems is to marry the frugality of value investing with the price action of momentum investing. You buy cheap stocks, but only after their prices have rebounded. By looking for stocks with a bit of price momentum, you are waiting for the market to signal that the worst is over for the firm." Con artists turn shell companies into cash 12/27/07   Crime "Oklahoma lawyer John Heskett logged onto his computer one day in late June, 2005, to check out an inactive shell company owned by his clients who were considering using it in a business deal. What he saw made no sense. "I saw this wild trading going on, and I couldn't imagine why," he said. "I was in total disbelief. I knew there could not be that many shares in the market, not even close, not even 1/100th of those shares in the market ... I had to pinch myself and say, 'Am I crazy?' " After some online searching and a few phone calls to the company's transfer agent, Mr. Heskett contacted the U.S. Securities and Exchange Commission to report a bizarre crime: Someone, he said, had stolen his client's public company. Sixteen months later, the SEC and the British Columbia Securities Commission announced they had reached settlements with two Canadian men who admitted to illegally taking control of Greyfield Capital Ltd. and arranging to have 600 million new shares issued using the company's ticker symbol. Surprisingly, the unusual case is not the only one of its kind in Canada or the United States. Regulators say corporate identity theft has become another twist in the world of securities fraud, where criminals seem to find endlessly creative ways to dupe investors." [Another great day for Canadian regulators.] Home prices post record decline 12/26/07   Real Estate "Home prices fell 6.7 percent in October, compared with a year ago, according to the S&P/Case-Shiller 10-city home-price index. It was the largest drop recorded since the index began in 1987. It marked the 10th consecutive month of price depreciation and 23 months of decelerating returns. "No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim," said Robert J. Shiller, chief economist at MacroMarkets, in a statement. Case-Shiller's 20-city index fell 6.1 percent. Shiller noted that 11 of the markets in the 20-city index posted a record fall." Buffett wins the Pritzkers' prize 12/26/07   Buffett "Marmon has improved its performance in recent years. The holding company, with more than 125 manufacturing and service businesses, hit a rough patch at the beginning of the decade as the economy softened. But in 2006, the company says revenue increased 24%, and now totals about $7 billion, while operating income surged 73%. (Because Marmon is privately held, it does not have to provide detailed financial statements to the public.) Marmon is owned by trusts for the benefit of the Pritzker family, which also developed the Hyatt Hotel chain. The Buffett deal is expected to close in the first quarter of 2008. Before the closing, Marmon will make a "substantial distribution of cash and certain assets to the selling shareholders," according to the statement." The Queen's 2007 Christmas message 12/25/07   Christmas "The Queen used her 50th televised Christmas message Tuesday to urge people to spare a thought for the vulnerable and disadvantaged living on the edge of society." A Child's Christmas in Wales 12/25/07   Christmas "Hear Dylan Thomas' recollection of the sounds and smells of a long-ago Christmas in the seaside town of his youth from the Harper Audio release "A Child's Christmas in Wales."" A Christmas Carol 12/25/07   Christmas "I have endeavoured in this Ghostly little book, to raise the Ghost of an Idea, which shall not put my readers out of humour with themselves, with each other, with the season, or with me. May it haunt their houses pleasantly, and no one wish to lay it. Their faithful Friend and Servant, C. D." Marty Whitman's big bets 12/21/07   Whitman Whitman interview on CNBC. RDN, MTG, MBI, and ABK. Now that's distressed investing! Pain Street USA: '08 housing outlook 12/21/07   Real Estate "The United States is deep in its worst housing slump since the Great Depression, and according to a new report, it's not going to get better any time soon. In a new survey, Moody's Economy.com says many metro areas will record losses of 20 percent or more during the downturn, with the national median price for single-family homes dropping 13 percent through early 2009. Factoring in discount offers from sellers, the actual price decline would be well over 15 percent. 80 of the 381 metro areas covered by the report will record double-digit losses, according to the report. Most of the worst-hit markets are in once high-flying areas such as California and Florida." Seize the day 12/20/07   Dreman "Thomas Jefferson once said that banks are more dangerous than standing armies. Certainly with Chairman Alan Greenspan at the helm of the Federal Reserve this was the case. Under his leadership the Fed was instrumental in creating two bubbles. The dot-com bubble of 1995--99 was followed by a grand loosening of credit that resulted in a second bubble, the housing mania of 2001--05. Still, when a bubble implodes there are always good opportunities for folks who have the courage to take risks. The credit crisis has been devastating to financial stocks. Banks, hedge funds and real estate investment trusts have incurred at least 800 publicly revealed writedowns of debt securities in the past year. Investors are running in fear from securities backed by, or in any way related to, mortgages or high-yield bonds. Both stocks and fixed-income securities have been knocked down to levels that are cheap even with worst-case assumptions about future defaults." The code breaker 12/20/07   Funds "Simons, standing just under 5 feet 10 inches tall and weighing 185 pounds (84 kilograms), has trod an unlikely path. A former code cracker for the U.S. National Security Agency, in 1968 he became chairman of the mathematics department at Stony Brook University, part of the New York state university system. He built the department into what David Eisenbud, former director of the Mathematical Sciences Research Institute in Berkeley, California, calls one of the world's top centers for geometry. In 1977, frustrated with a math problem and eager for change, he abandoned academia to start what would become Renaissance, hiring professors, code breakers and statistically minded scientists and engineers who'd worked in astrophysics, language recognition theory and computer programming." The subprime in the schoolhouse 12/20/07   Markets "Nobody knows how much more pain is coming. State funds could lose hundreds of millions of dollars, says Lynn Turner, chief accountant of the U.S. Securities and Exchange Commission from 1998 to 2001. "If you're dealing with short-term money market funds, people expect those to have low risk and not be invested in these SIVs and other very high-risk instruments," Turner says. If public funds lose money, towns and local agencies could raise taxes, sell more debt or, more likely, trim budgets, Turner says. "Cutting spending usually means people losing jobs because someone else didn't do their job," he says." Bill Miller Q3 2007 12/18/07   Miller "Where will the new leadership come from? The same place it usually does: the old laggards. I think the new leadership will be US, large-cap, dollar-based, and grow to encompass what no one wants to own today, especially financials and consumer. I also think so-called growth stocks will continue to do fine. When growth becomes scarcer and the discount rate becomes lower, growth becomes more valuable. More particularly, just as the right thing to do in 2002 was to buy what everyone was panicked about, I think the greatest gains over the next 5 years will be made in those securities people are panicked about today. For specific names, consult the 52-week new low list." Luck, persistence, and what to do about it 12/18/07   Growth Investing "Despite earnest and diligent study, analysts often produce company models that are wildly off the mark, usually erring on the side of optimism. Even analysts who consider ranges of value outcomes attach probabilities to favorable scenarios that are too high. Some researchers attribute this inaccuracy to overconfidence, but that is only part of the story. Another way to understand the challenge is based on what renowned psychologist Daniel Kahneman calls the inside-outside view. An inside view considers a problem by focusing on the specific task and the information at hand, and predicts based on that unique set of inputs. This is the approach analysts most often use in their modeling, and indeed is common for all forms of planning. In contrast, an outside view considers the problem as an instance in a broader reference class. Rather than seeing the problem as unique, the outside view asks if there are similar situations that can provide useful calibration for modeling. Kahneman notes this is a very unnatural way to think precisely because it forces analysts to set aside all of the cherished information they have unearthed about a company. This is why people use the outside view so rarely." After the money's gone 12/15/07   Markets "On Wednesday, the Federal Reserve announced plans to lend $40 billion to banks. By my count, it's the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn't count on it. In past financial crises - the stock market crash of 1987, the aftermath of Russia's default in 1998 - the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn't working. Why not? Because the problem with the markets isn't just a lack of liquidity - there's also a fundamental problem of solvency." A short course in thinking about thinking 12/15/07   Behaviour "And some fifteen years ago or so, I started studying whether people remembered correctly what had happened to them. It turned out that they don't. And I also began to study whether people can predict how well they will enjoy what will happen to them in future. I used to call that "predictive utility", but Dan Gilbert has given it a much better name; he calls it "affective forecasting". This predicts what your emotional reactions will be. It turns out people don't do that very well, either." Scrooge a man for our times 12/14/07   Christmas "Christmastime is inevitably accompanied by allusions to Ebenezer Scrooge. As portrayed in Dickens' "A Christmas Carol," Ebenezer is a thoroughly disagreeable, curmudgeonly, miserly misanthrope. I sympathize. And not just because similar contentions are routinely made about me. Enough is enough. It's time to move on, as they say, from the conventional view of the man as "a squeezing, wrenching, grasping, scraping, clutching, covetous, old sinner! Hard and sharp as flint, from which no steel had ever struck out generous fire; secret, and self-contained, and solitary as an oyster." We as a society have come a long way in the 160 years since Dickens wrote his story. We're kinder and gentler and infinitely more accepting. Ebenezer would be perceived much differently today." The Top 500 U.S. Stocks for 2008 12/14/07   Stingy Investing "Some extraordinary qualities are needed to make our list of top stocks. On the value front, all our chosen stocks pay a dividend and sell for modest price-to-sales and price-to-book-value ratios. On the growth side, they demonstrate strong increases in sales per share and earnings per share. In addition, most generate healthy returns on equity, carry relatively little debt, and enjoy rising share prices. Keep in mind, though, that these stocks are controversial. After all, strong growth is rarely to be had at rock-bottom prices without some risk." A low, low interest rate of 396 percent 12/14/07   Debt "A payday loan is a small-dollar, short-term loan with fees that can add up to interest rates of almost 400 percent. They're generally taken out when the borrower is caught short on cash and promises to pay the balance back next payday. If it sounds like legal loan-sharking, it's not. "Loan sharks are actually cheaper," said Bill Faith, a leader of the Ohio Coalition for Responsible Lending. The industry portrays it as emergency cash, but critics say the business model depends on repeat borrowing where the original loans are rolled over again and again." Value's day once more 12/08/07   Grant "Is anyone happy? Well, value investors ought to be. To their way of thinking bear markets are heaven-sent. Of all people, the disciples of Benjamin Graham and David L. Dodd understand the investment appeal of everyday low prices. They like it when stocks and bonds go on sale. They are the Wal-Mart shoppers of Wall Street." Bush's bad mortgage medicine 12/07/07   Government "The Bush Administration's plan to rescue the housing market and keep the economy from slipping into recession took flak yesterday for freezing interest rate hikes for a mere fraction of subprime, adjustable-rate borrowers. But there's a bigger risk: It could deepen and lengthen the credit crisis." Investor timing and fund distribution channels 12/06/07   Funds "We find that investors who transact through investment professionals using conventional distribution arrangements experience substantially poorer timing performance than investors who purchase pure no-load funds. Investors in all three principal load-carrying retail share classes (A, B, and C) significantly underperform a buy-and-hold strategy. Among all load funds, Class B investors suffer from the poorest cash flow timing, underperforming a buy-and-hold strategy by 2.28% annually, compared with annual underperformance of 0.78% for investors in pure no-load funds. No-load index funds are the only funds found to show no evidence of poor investor timing. Although investors are ultimately responsible for their own investment choices, these findings question the value being added by investment professionals who sell mutual fund shares through conventional distribution arrangements." Chasing performance hurts load fund investors 12/06/07   Funds "We find that investors who transact through investment professionals using conventional distribution arrangements experience substantially poorer timing performance than investors who purchase pure no-load funds. Investors in all three principal load-carrying retail share classes (A, B, and C) significantly underperform a buy-and-hold strategy. Among all load funds, Class B investors suffer from the poorest cash flow timing, underperforming a buy-and-hold strategy by 2.28 percentage points annually, compared with annual underperformance of 0.78 percentage points for investors in pure no-load funds. No-load index funds are the only funds found to show no evidence of poor investor timing." High-yield stocks for retirement 12/06/07   Dividends "Ned Davis Research recently crunched the numbers for Money and found that a high-yielding portfolio launched at the worst time in the past 40 years - before the 1973-74 bear market - not only would have kept your income growing at the pace of inflation but would have increased in value eightfold (assuming an initial withdrawal rate of 4.5 percent). An S&P 500 portfolio, on the other hand, would have been used up by now. Over time, high-paying stocks also generate more income than government bonds. That's because while bond income is fixed, dividends aren't." The prince of value 12/05/07   Value Investing "If there's such a thing as an aristocracy of American investing, Christopher Browne is a full member. He's one of five managing directors of Tweedy Browne, a firm co-founded by his father, who brokered stock trades for Benjamin Graham, the creator of modern securities analysis. Later, when Graham's most illustrious pupil, Warren Buffett, wanted to take a controlling interest in a then sleepy textile company called Berkshire Hathaway, Tweedy Browne bought the stock. Given this lineage, it's hardly a surprise that Browne would become a spokesman for Graham's and Buffett's investing philosophy." Ever more fleeting? 12/03/07   Stocks "There are still way too many analysts who expect too many companies to generate annual long-term earnings growth of 20% to 25% or more. Analysts pay too little attention to how easily such a rapid rate of growth can fade after just a few years. Research departments aren't shy about putting out lists of companies they expect to generate annual earnings increases of 15% or more for at least five years. One value of Leuthold's work is the reminder it provides that such high sustained earnings growth is truly rare." Why the OSC so rarely gets its man 12/02/07   Crime "Bruce McLaughlin took millions of dollars from the company he led to pay off personal debts. That was the conclusion of a court-appointed accounting firm that looked into suspicious transactions at Mississauga property developer Mascan Corp. The findings of the audit pressured the Ontario Securities Commission to take legal action on behalf of Mascan's minority shareholders. That was 23 years ago. The case is still on the OSC's books, listed on the commission's website under 'Current Proceedings.'" Why white-collar crime team fizzled 12/02/07   Crime "Today when the enforcement team makes the news, it's usually because of its dismal track record. Instead of reaping glory, the vaunted police squad is becoming a public whipping boy in the debate about Canada's perceived tendency to let white-collar crime go unpunished." Beware our shadow banking system 12/02/07   Gross "The tangled web of subprimes has claimed more than its share of victims in recent months: homeowners by the hundreds of thousands, to be sure, but also those who created, packaged, insured, distributed, and ultimately bought what should have been labeled "junk mortgages" but which by a masterstroke of marketing genius received a more respectable imprimatur." Video tour of Berkshire Hathaway 12/02/07   Buffett "CNBC's Becky Quick traveled to Omaha, Nebraska recently to shoot additional material for her one-hour special focusing on Warren Buffett's whirlwind tour of Asia. While she was there, Buffett gave Becky an on-camera tour of the Berkshire Hathaway offices. He talked about some of the mementos he's collected and their personal significance to him, and to his investing style." How to lose $9 trillion in a bull market 11/29/07   Zweig "Based on decades of data from 19 countries, Dichev thinks that the average investor incurs a "timing penalty" of 1.5 percentage points a year by buying high and selling low. Impatience will cost you dearly." Imitation is the sincerest form of flattery 11/26/07   Buffett "We analyze the performance of Berkshire Hathaway's equity portfolio and explore potential explanations for its superior performance. Contrary to popular belief we show Berkshire's investment style is best characterized as a large-cap growth. We examine whether Berkshire's investment performance is due to luck and find that beating the market in 28 out of 31 years places it in the 99.99 percentile; however, incorporating the magnitude by which Berkshire beats the market makes the 'luck' explanation unlikely even after taking into account ex-post selection bias. After adjusting for risk we find that Berkshire's performance cannot be explained by assuming high risk. From 1976 to 2006 Berkshire's stock portfolio beats the S&P 500 Index by 14.65%, the value-weighted index of all stocks by 10.91%, and the Fama and French characteristic portfolio by 8.56% per year. The market also appears to under-react to the news of a Berkshire stock investment since a hypothetical portfolio that mimics Berkshire's investments created the month after they are publicly disclosed earns positive abnormal returns of 14.26% per year. Overall, the Berkshire Hathaway triumvirates of Warren Buffett, Charles Munger, and Lou Simpson posses' investment skill consistent with a number of recent papers that argue investment skill is more prevalent than earlier papers suggest." Freddie and Fannie's Achilles' heel 11/26/07   Stocks "Mortgage giants Freddie Mac and Fannie Mae need capital - in today's credit crisis, there's no doubt about that. Freddie even said last week that it was "seriously considering" cutting its $2 annual dividend by half, a radical step indicating how strapped the company is. Freddie also reported it had hired two Wall Street firms to explore "capital-raising alternatives." And Freddie and Fannie are going to need some especially creative alternatives. Why? When either Freddie or Fannie attempt to build capital, they are handicapped by a peculiarity that very few investors know about: They cannot sell the most popular kind of preferred stock, the "cumulative" variety, because their regulator will not let these securities count toward capital." Is your index too active? 11/23/07   Stingy Investing "Index funds are increasingly popular with savvy investors seeking low-cost diversified portfolios. As an added bonus, they often outperform many mutual funds. Indeed, Warren Buffett said in his 1993 annual letter to shareholders, 'By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals.' But there is an astonishingly easy way to beat the index at its own game. It turns out that indexes are too active. That is, they tend to buy and sell stocks too frequently which puts a damper on their performance." Graham's Simple Way 11/23/07   Stingy Investing "Warren Buffett's insurance company GEICO is currently running a series of humorous ads featuring the line, 'So easy even a caveman can do it'. In a curious twist of fate, Buffett's mentor Benjamin Graham developed a way to pick stocks that even cavemen would appreciate. Graham described his Simple Way in a 1976 article called The Simplest Way to Select Bargain Stocks that can be found in Janet Lowe's book The Rediscovered Benjamin Graham. Given its recent success, these days stock-picking cavemen are dining out on mammoth steak." He has never been more bearish 11/23/07   Value Investing "Mr. Watsa never lost his image as a skilled investor. Hamblin Watsa Investment Counsel, Fairfax's internal money management firm, earned 17.7 per cent returns, compounded annually, on its stock investments between 1997 and 2006. "If they can make 7 per cent [on the whole portfolio, including bonds], the earnings power is ridiculous," said Wade Burton, a portfolio manager at Mackenzie Financial Corp.'s Cundill Investment unit, which is one of Fairfax's largest shareholders. "They're in a really good place right now." Mr. Watsa suggested the decision to put 75 to 80 per cent of Fairfax's portfolio into government debt - "for the first time, I think, ever" - reflects his view that credit markets will take a long time to digest the problems in the U.S. real estate and mortgage business." Shanghaied 11/22/07   World "The U.S. used to have absurdities like this--companies in effect declaring a profit from the rise in their own share prices. In the 1920s, that is. Fast-forward to Shanghai and the roaring 2000s. In two years the Shanghai Composite Index has quintupled and the Shenzhen Component Index has more than sextupled. Now China's combined market of 1,500 companies with A shares (the primary kind available on the mainland) is trading at 40 times earnings. Chinese companies' shares also have soared in Hong Kong and abroad, but not to the same degree. Circular ownership--with the potential for a pair of companies to prop up each other's share price and earnings--is not at all uncommon. "They actually support each other and increase the stock price. More and more companies are like this, particularly the big companies," says Xu Xianghua, a branch manager for First Capital Securities in Beijing." Of blind squirrels and flying pigs 11/22/07   Behaviour "The dollar is collapsing and global investors are dumping dollars so it will continue to fall. That in turn will lead to higher inflation and then the Fed will have to raise interest rates. Oil is closing in on $100 a barrel. We have the worst housing market since the Great Depression. There is a financial crisis caused by the subprime mortgage debacle. Banks are tightening credit standards. And if you needed more reasons to believe the stock market was headed south you could always throw in global warming. Given all of these obvious reasons to be bearish about stocks, what should investors do? The answer is nothing, except to adhere to their well-thought-out plans. There are many reasons for ignoring even what seems to be obviously bearish information. Let.s see why this is the case." My Hero, Benjamin Grossbaum 11/22/07   Graham "I am a frankly worshipful admirer of Graham's. I love him for his heart as much as for his head. Between 1929 and 1932, his investment partnership lost 70% of its value. Not until 1936 did it recoup all it relinquished since the Crash. Yet Graham persevered and, along with his partner, Jerry Newman, went on to achieve a brilliant long-term investment record - not excluding those three disastrous years. We have all heard the platitude, "The first rule of investing is not to lose money and the second rule is not to forget the first." Very helpful. Well, Graham shows that a debilitating loss is no reason to give up. . . . Never quit." Freddie, Fannie seek a few billion 11/20/07   Markets "Fannie and Freddie are seen to be an important source of demand for mortgages, so any problems at these companies could end up reducing the amount of mortgage lending that gets done by the banks that sell mortgages to Fannie and Freddie. Because of their integral role, it would be no surprise if OFHEO, as well as other financial regulators like the Federal Reserve, were keen to see a ramp up in capital at both companies. Such capital increases will have to be very large. Neither Fannie nor Freddie is close to having sufficient capital to weather a full-blown recession." A Buffett investment that wasn't 11/20/07   Buffett "Last week, it began to look as if CarMax, one of the pioneers of the used-car superstore, had become the next target. Legndary investor Warren Buffett was said to be buying in. Headlines like "Buffett buys major stake in CarMax" and "Buffett Buy Sends CarMax shares soaring" appeared. Copycat investors sent CarMax's stock price shooting up when the news broke on November 15. CarMax's stock jumped $1.62, up 7.5%. But the story as reported by many news outlets isn't accurate, because Buffett wasn't directly involved in the purchase. The stock was bought by GEICO, the auto insurer and a subsidiary of Buffett's company, Berkshire Hathway. There's a big difference, as I'll explain." 2007 Chou Lecture 11/18/07   Chou "Mr. Chou has operated two of the country's most successful funds, Chou Associates Fund and Chou RRSP fund, for the last 18 years." Lining up to invest? I'm inclined to look the other way 11/17/07   Real Estate "It is here that memories of gold buyers lining up before Deak Pereira in 1980 keep running through my mind, and bring up the nagging thought: Can this be the top of the million-dollar-condo bubble? It is, of course, possible that it's not, and that a four-room (as yet unbuilt) Toronto condo would be worth $10-million - maybe more - very soon, just as it was possible that an ounce of 1980 gold would be worth north of $800 soon after. But just as the gold of 1980 revisited its price only 27 years later, those lining up to buy downtown Toronto condos today may also find they must wait several years - perhaps many - before they get their money back." Anatomy of a panic 11/17/07   Derivatives "For three days in August, an obscure but massive investment class teetered on the brink of a meltdown, rescued only by the ingenuity of a small group of bankers and lawyers. The aftershocks have shaken the markets, destroyed reputations and frayed friendships" Buying what Buffett buys on filings doubles S&P 500 11/16/07   Buffett "Buying whatever billionaire Warren Buffett bought, often months after his share purchases, delivered twice the return of the Standard & Poor's 500 Index during the past three decades. Investors would have earned an annual return of 24.6 percent by buying the same stocks as Buffett after he disclosed his holdings in regulatory filings, sometimes four months later, according to a soon-to-be-released study by Gerald Martin of American University in Washington and John Puthenpurackal of the University of Nevada, Las Vegas. The S&P 500 rose 12.8 percent a year in the same period." Foreclosures hit a snag for lenders 11/15/07   Bonds "A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools." From ants to people, an instinct to swarm 11/14/07   Behaviour "By studying army ants - as well as birds, fish, locusts and other swarming animals - Dr. Couzin and his colleagues are starting to discover simple rules that allow swarms to work so well. Those rules allow thousands of relatively simple animals to form a collective brain able to make decisions and move like a single organism. Deciphering those rules is a big challenge, however, because the behavior of swarms emerges unpredictably from the actions of thousands or millions of individuals." A seasoned pro scoops up mortgage stocks 11/11/07   Value Investing "As mortgage insurance stocks have gone into freefall over the past month, speculation has been intense about whether a deep-pocketed investor would step in and start buying, in the belief that the stock prices had fallen too far. Old Republic International, a sleepy Chicago-based insurance company led for the last 17 years by Aldo Zucaro, has made that bet." Deductions failed the smell test 11/11/07   Taxes "What about your tax planning? Does it pass the smell test? There are some court decisions where taxpayers have escaped the long arm of the Canada Revenue Agency by getting away with deducting certain costs, or gaining some other tax benefit, and I just conclude they got lucky. There are other cases where the taxpayer has lost the battle, and it comes as a surprise to no one. Here's a court decision that offers some valuable lessons in claiming tax deductions." Accounting for leverage 11/11/07   Value Investing "The B/P ratio can be decomposed into an enterprise book-to-price (that pertains to operations and potentially reflects operating risk) and a leverage component (that reflects financing risk). The empirical analysis shows that the enterprise book-to-price ratio is positively related to subsequent stock returns but, conditional upon the enterprise book-toprice, the leverage component of B/P is negatively associated with future stock returns." Why you're not a rational investor 11/07/07   Indexing "We like to think we make investment decisions based on facts. But we often end up paying to express our beliefs, to acquire status, or to seem smarter than our peers." ABCP hits main street 11/07/07   Bonds "The turmoil in asset-backed commercial paper knocked Bay Street on its ear in August and now, three months later, it has re-emerged on Main Street as pensioners and individual investors start to feel the pain. Because of holdings of illiquid ABCP, the pension fund for employees of the University of Western Ontario has restricted redemptions on some of its funds while the pension fund for 35,000 current and former employees of co-ops and credit unions may be forced to take similar steps." Borrowers face dubious charges 11/06/07   Debt "As record numbers of homeowners default on their mortgages, questionable practices among lenders are coming to light in bankruptcy courts, leading some legal specialists to contend that companies instigating foreclosures may be taking advantage of imperiled borrowers. Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures." The Long Johns: Subprime 11/04/07   Fun A fun introduction to Mr. Market. [video] The Long Johns: Meeting the adviser 11/04/07   Fun Northern Rock + Comedy = Priceless [video] Are you really such a daredevil? 11/04/07   Behaviour "The point is to position your portfolio in a way that makes it less likely that your emotions will get the better of you in a sharp downturn, and to do so while giving up as little as possible of the long-term gains that stocks offer. There are several sensible ways to do that." A strategy to keep your prized stocks 11/04/07   Taxes "William's advisers suggested that he consider an equity monetization strategy. Now, there are different strategies we could talk about. Today, let me share what is probably the most common." The many benefits of monetizing 11/04/07   Taxes "But the story could help you to: lock-in accrued gains on an investment; defer tax on those accrued capital gains; create liquidity; diversify your portfolio; create a tax deduction for interest costs, and avoid margin calls on money borrowed to invest. These benefits could leave you laughing after all - all the way to the bank." Prisoners of debt 11/01/07   Debt "In a financial version of Night of the Living Dead, debts forgiven by bankruptcy courts are springing back to life to haunt consumers. Fueling these miniature horror stories is an unlikely market in which seemingly extinguished debts are avidly bought and sold." Buffett testifies 10/31/07   Buffett "Billionaire investor Warren E. Buffett sat in front of a video camera in Omaha, spelled his name for the record and minced no words as he testified for the government yesterday in its case against former Freddie Mac chief executive Leland C. Brendsel. Brendsel is accused of presiding over accounting manipulations and running Freddie Mac in a reckless manner. Buffett, one of the most successful and revered investors, sold a huge stake in the mortgage funding company before the manipulations came to light, and the government wanted him to explain why. Buffett said he was troubled in part by a Freddie Mac investment that had nothing to do with its business. "I follow the old dictum: There's never just one cockroach in the kitchen," Buffett said." Tax reductions for Canadians 10/30/07   Taxes "The goods and services tax (GST) will be reduced by a further 1 percentage point as of January 1, 2008, fulfilling the Government's commitment to reduce the GST to 5 per cent. The lowest personal income tax rate will be reduced to 15 per cent from 15.5 per cent, effective January 1, 2007. The amount that all Canadians can earn without paying federal income tax will be increased to $9,600 for 2007 and 2008, and to $10,100 for 2009." Patient Capital Management's Q3 2007 letter 10/30/07   Value Investing "Which asset class has performed better since PCM's inception in March of 2000; T-Bills or the S & P 500? T-Bills have outperformed the S & P 500 during the March 31, 2000 to September 30, 2007 period. The S&P 500 has generated a compound annual rate of return of only 1.92% compared to an average yield of 3.18% for T-Bills over the same period. This fact may be a surprise to many because of the strongly ingrained belief that equities always outperform fixed income instruments." David Einhorn's Graham & Dodd breakfast speech 10/30/07   Markets "Without much fanfare the ratings agencies abandoned this practice of AAA meaning AAA and BBB meaning BBB. Instead for each type of bond, they use a different rating scale with different so-called 'idealized default rates' for each rating. The idealized default rate for a municipal bond at a given rating is less than the idealized default rate for a corporate bond, which is less than the idealized default rate for an asset backed security which is less than the idealized default rate for a CDO. As an example of the soundness in this system, Nomura securities pointed out that hypothetically, if you took a AA+ rated asset backed security and repackaged it all by itself and called the repackaged instrument a CDO, it becomes AAA, because the CDO has a higher idealized default rate than the asset backed security." The catastrophist view 10/29/07   Markets "Their bearish arguments come in many shapes and sizes, but here's the basic one: The past five or six years have been deceptively fortunate ones for the U.S. economy. That's because any troublesome developments - the surge in oil prices from $28 per barrel in 2003 to about $87 today, for example - have been papered over by rising home prices. Home equity has been used to buy flat-screen TVs, SUVs, and more homes. Wall Street bought up all this debt from lenders, thereby allowing them to lend more. The softening of real-estate prices in most parts of the United States put a crimp in this system, but it hasn't stopped it. The question is, what, if anything, will? What will bring on the apocalypse that Schiff and others believe is inevitable?" [Scary Halloween stories for adults] Citigroup: 'Gimme shelter' 10/29/07   Stocks "This may sound silly, but let me ask you a question. Let's say that I maxed out my credit at Citigroup to speculate on a house whose market price is now less than what I paid. Citi wants its money, but instead I say, "Sorry, the house is selling for less than its true value. As soon as it sells for what it should, I'll send you a check." What do you think Citi's reaction would be? How about "Sir, where should I send the repo man?" Well, folks, Citi seems to have put itself in just such a fix by borrowing lots of money to buy assets that have dropped in market value. But instead of summoning the repo (as in repossession) man, some of the world's biggest hitters are trying to set up a huge fund to buy time for Citi and some other institutions with similar problems. " Is marriage a dumb move? 10/26/07   Thrift "The decision to wed or not, of course, is between you, your intended and your conscience. But you should realize that from a coldhearted financial perspective, the U.S. tax code and Social Security rules don't necessarily come down in favor of marriage for people with a substantial amount of assets." A beautiful mind 10/26/07   Stocks "If you believe that thinkers never accomplish much in the real world, you should meet Rob Morrison. He's a quiet, analytical man who started out as a competitive chess player before becoming fascinated by the world of money. Over the past 25 years, while working from his computer in his comfortable Toronto home, he has thought long and hard about how to invest well. By putting his ideas into practice, he has grown his personal portfolio from a few hundred thousand dollars to more than $10 million." For sale: 2 million empty homes 10/26/07   Real Estate "The number of vacant homes for sale rose in the third quarter, according to the latest government reading that casts new harsh light on the weakness of the housing market. The Census Bureau report puts the number of vacant homes for sale at 2.07 million in the period, up about 2 percent from the second quarter, and 7 percent above year ago levels." 3 bargain stocks 10/23/07   Whitman ""Safe and cheap" makes for a comforting mantra. Rather than timidity, though, Whitman's approach actually calls for remarkable fortitude. It requires the nerve to pick through distressed companies that others are ignoring and demands the conviction to see big gains come to fruition." A super-duper bad-loan bailout scam 10/22/07   Markets "When I first heard about this, I was outraged, disgusted and slightly depressed. I thought, here we go, another bailout. Barney Frank and friends are trying to bail out the homeowners. Wall Street, the Treasury Department and the Bank of England appear determined to do whatever it takes so that we have absolutely no price discovery on any mortgage-related assets that may have gone bad -- thereby giving a pass to the folks who've made obscene amounts of money conceiving and marketing them. Whether you call this crony capitalism or socialism, the worst of it is what we have become." Fifteen ways to reduce your 2007 taxes 10/22/07   Taxes "Fall is always a good time to take stock of one's tax situation. As several weeks remain before the end of the year, now is the time to review your 2007 transactions and make any necessary adjustments. Tax planning is always an issue, whether you work, are retired, operate a business directly or operate a business through a corporation. Here are fifteen ways, among others, to save on taxes for 2007." Housing: that sinking feeling 10/19/07   Real Estate "For the first time, big builders are offering massive, often six-figure, price cuts in overbuilt developments nationwide, giving the industry a kind of shock treatment designed to move inventory off the books fast. It remains to be seen whether these radical measures will revive the market or deepen the slump, but it's certainly having an impact on the local communities." Global warming delusions 10/18/07   World "Instead, like fashions that took hold in the past and are eloquently analyzed in the classic 19th century book "Extraordinary Popular Delusions and the Madness of Crowds," the popular imagination today appears to have been captured by beliefs that have little scientific basis. Some colleagues who share some of my doubts argue that the only way to get our society to change is to frighten people with the possibility of a catastrophe, and that therefore it is all right and even necessary for scientists to exaggerate. They tell me that my belief in open and honest assessment is nave. "Wolves deceive their prey, don't they?" one said to me recently. Therefore, biologically, he said, we are justified in exaggerating to get society to change." Credit crunch taking a toll, Bank of Canada says 10/18/07   Markets "The global credit crunch is taking a toll on Canadian banks' balance sheets, and has prompted lenders to curtail their credit, the Bank of Canada says. 'Canadian financial institutions are facing substantially increased funding needs,' the central bank said in its first full tally of the damage done by the recent financial turmoil. Canadian banks have been forced to hold high amounts of commercial paper of questionable value in their inventories, the central bank pointed out. Plus, corporate borrowers are calling on their banks to come through with funding arranged under pre-committed lines of credit, now that some market sources of funding are not as accessible. The Canadian banks are solvent enough to handle it, the central bank said, but they are reacting by tightening up credit conditions." Junk mortgages under the microscope 10/18/07   Bonds "It's getting hard to wrap your brain around subprime mortgages, Wall Street's fancy name for junk home loans. There's so much subprime stuff floating around - more than $1.5 trillion of loans, maybe $200 billion of losses, thousands of families facing foreclosure, umpteen politicians yapping - that it's like the federal budget: It's just too big to be understandable. So let's reduce this macro story to human scale. Meet GSAMP Trust 2006-S3, a $494 million drop in the junk-mortgage bucket, part of the more than half-a-trillion dollars of mortgage-backed securities issued last year. We found this issue by asking mortgage mavens to pick the worst deal they knew of that had been floated by a top-tier firm - and this one's pretty bad." Views on the Canadian dollar 10/18/07   Markets "Over the past year the Canadian dollar has appreciated from $0.85 to $1.02US or 20%. Admittedly, the Canadian dollar was undervalued at $0.70-$0.80 and at $0.85, in our opinion, it was fairly valued." Dividend index hides some dogs 10/17/07   Dividends "We like dividends, particularly companies that raise their dividends regularly. For tax-efficient income and steady capital gains, it's hard to beat a basket of stocks that bump up their payouts every year. So, naturally, we were excited to hear that Standard & Poor's has launched a Canadian version of its "Dividend Aristocrats" index, with an exchange-traded fund expected to follow, possibly next year. Unfortunately, the more we learned about the index, the more glaring were its shortcomings." So simple it works 10/14/07   Stingy Investing "Value investing is so easy that your grandfather can do it - that is, if he follows the advice of Ben Graham, the grandfather of value investing. Back in 1976, Graham, a Wall Street financier and Columbia University professor, developed what he called The Simplest Way to Select Bargain Stocks. Investors who followed his approach have been riding the gravy train ever since." Bear Stearns' bad bet 10/14/07   Stocks "The revelations shed new light on the murky dealings inside the booming $1.3 trillion hedge fund industry, which now accounts for up to a third of all daily trading on Wall Street. They seem to underscore critics' biggest complaint: that many hedge funds use astonishing amounts of leverage, or borrowed money, in sometimes reckless ways. The risks of "fair value" accounting, the practice that allows money managers to estimate the values of securities for which they can't find true market prices, are thrown into sharper focus as well. Coming soon, for better or worse: louder calls in Washington for more oversight of the largely unregulated hedge fund industry." Buffett predicts a long flight for loonie 10/14/07   Buffett "At an invitation-only Toronto dinner Thursday for about 140 prominent investors, billionaire investor Warren Buffett said he expects the Canadian dollar to continue rising beyond the parity it recently reached with the U.S. dollar." Interview with Warren Buffett 10/14/07   Buffett "Nebraska's Warren Buffett is known as the Oracle of Omaha for the savvy stock market investments that have made him one the wealthiest people in the world. Through his holding company Berkshire Hathaway, Buffett, 77, has amassed a fortune investing in companies like Coca-Cola, famously shunning trendy, riskier bets like Internet and technology companies. His success has earned him a near cult-like following, evident each year at Berkshire's hugely popular Omaha shareholders' meeting, which Buffett once called Woodstock for Capitalists. But for all his riches, Buffett is equally well-known for his frugal and folksy ways, and lately for his philanthropy. In 2006 he said he would give away 85 per cent of his roughly $50-billion fortune, with the bulk going to the Bill & Melinda Gates Foundation in annual instalments that Buffett insists be distributed in the year they are received. His sister Doris is also involved in philanthopy and runs the Sunshine Lady Foundation, which often deals with personal entreaties for aid that Buffett receives." The skinny on pension splitting 10/14/07   Taxes "Take the announcement last year about pension income splitting. Canadian taxpayers have had many questions about how this is going to work. The Canada Revenue Agency issued an announcement on July 18 that answered some of the more common questions. Let me share some highlights." The blow-up artist 10/11/07   Funds "On a wall opposite Victor Niederhoffer's desk is a large painting of the Essex, a Nantucket whaling ship that sank in the South Pacific in 1820, after being attacked by a giant sperm whale, and that later served as the inspiration for 'Moby-Dick'. The Essex's captain, George Pollard, Jr., survived, and persuaded his financial backers to give him another ship, but he sailed it for little more than a year before it foundered on a coral reef. Pollard was ruined, and he ended his days as a night watchman. The painting, which Niederhoffer, a sixty-three-year-old hedge-fund manager, acquired after losing all his clients' money - and a good deal of his own - in the Thai stock market crash of 1997, serves as an admonition against the incaution to which he, a notorious risktaker, is prone, and as a reminder of the precariousness of his success." The sources of value 10/11/07   Montier "The results of this further decomposition are shown in the chart below again for the period 1963-2006. The picture reveals show huge differences between value and growth stocks. Value stocks see hardly any growth in book value - not hugely surprising, they don't tend to invest large sums, in general they are more interested in cost cutting than investment. However, their is a very strong tendancy for convergence in price to book terms - that is to say their valuation rebound - although the decomposition is silent on whether this is the result of a bounce back in profitability or not. The same can not be said of growth stocks. They see an enormous amount of growth in book value - as they engage in large cap ex and M&A. However, they convergence is negative, they witness declines in price to book as their profitability erodes and valuations return to 'normal' levels." 1929 Redux: Heading for a crash? 10/08/07   Markets "Your predecessors on the Senate Banking Committee, in the celebrated Pecora Hearings of 1933 and 1934, laid the groundwork for the modern edifice of financial regulation. I suspect that they would be appalled at the parallels between the systemic risks of the 1920s and many of the modern practices that have been permitted to seep back in to our financial markets. Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials - excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence." Qtrade wins again 10/07/07   Brokers "Investors have the online brokerage business right where they want it. To start with, stock-trading commissions are plunging. After years of being stuck in the $24-to-$29 range, more and more brokers are charging just under $10 as long as your accounts have at least $50,000 to $100,000 in total assets. At the same time, these firms are giving clients more for their money with better tools for finding investments and managing their accounts." Get buffed up 10/05/07   Buffett "Convinced to attend university by his father, stock-broker-turned-congressman Howard Buffett, the young Buffett complained he knew more than his teachers. When he attended Columbia University's business graduate school (after being turned down by Harvard for being too young), he met Benjamin Graham, whose investment strategies would turn out to greatly influence Buffett's own business model. The prodigy was the only student to ever earn an A+ in one of Graham's classes." Canada's losing war against white-collar crime 10/05/07   Crime "The system is pretty much non-existent. You can fix something that is hemorrhaging, but if the body is already lifeless, you have to start fresh. We need politicians to admit that the system is broken from the top to the bottom. Canadians have to understand that we have a two-tiered justice system, where people with money can play the system. Show me a person who has gotten any sort of satisfaction from going to the authorities after being victimized by a white-collar fraud.who got their money back in a timely fashion and didn't go through a lot of grief. I can't think of a single person like that." Life and debt in suburbia 10/05/07   Thrift "Assessing how the neighbors are doing financially and what that means about how we are doing is practically a national pastime. The guessing game starts off as harmless pillow talk and community pool chatter, an outgrowth of natural curiosity. Just how much money must Susie and Bob have to be able to afford that new kitchen, three cars and a family safari? Then too, every homeowner has a vested interest in the financial well-being of his or her neighbors. Homeowner associations have long understood that nothing raises the value of a home more than an expanse of trim lawn and well-kept homes on either side. But the finances of those around you affect more than just the perceived value of your property. They also, like it or not, help shape how much you spend and save and color your perceptions of your own financial well-being." The high dividend yield return advantage 10/03/07   Dividends "There is an abundance of empirical evidence which suggests that portfolios consisting of higher dividend yielding securities produce returns that are attractive relative to lower yielding portfolios and to overall stock market returns over long measurement periods." What do they know? 10/02/07   Gross "Bernanke, however, may face a problem with this elevator-based ease in monetary policy. As I have pointed out in prior pages and Outlooks, globalization and financial innovation have enormously complicated the job of central bankers. Whereas in prior decades a "one size fits all" policy rate move has coincidentally and democratically affected households and corporations alike, the 21st century has ushered in an innovation revolution favoring corporations with global investment opportunities as opposed to individuals with daily bills to pay. The same 4.75% rate is not and cannot be "neutral" for both sides in today's U.S. economy. Whereas current yields are not restrictive for investment grade corporations with global opportunities, they are far too high for homeowner Jane Doe and two million of her neighbors facing higher and higher monthly payments on adjustable rate mortgages. Should Bernanke put on a brave face and freeze the elevator and rates in mid-descent, he risks exacerbating a housing crisis in the making. Yet, should he favor the homeowner over the corporation, he risks reigniting speculative equity market behavior, and - in addition - a run on the dollar." Buffett's billions came from one book 09/30/07   Graham "Who was David LeFevre Dodd? He was an economist, financial analyst and finance professor for four decades at Columbia University, where he co-wrote a classic book, "Security Analysis," with colleague Benjamin Graham that laid out the case for value investing, a strategy that Warren Buffett later adopted and made billions from." Can we turn off our emotions when investing? 09/29/07   Behaviour "How about understanding what our real tolerance for risk is? Mr. Zweig makes the usually overlooked point that our risk tolerance is not a fixed thing, but changes from day to day, even hour to hour, depending on our mood. Indeed, research has shown that the way we think about risk often depends on how others have framed the question for us. Amazingly, for instance, people tend to be more sanguine about risk when it is expressed as a percentage (10 percent, say) than when it is expressed as a frequency (one out of 10)." The lone raider 09/29/07   Value Investing "Over the past three years, the 47-year-old Armoyan has been on a tear, seizing control of a dozen mostly beaten-up but asset-rich companies, including Versacold Income Fund, a refrigerated warehousing/trucking outfit; Royal Host Real Estate Investment Trust [RYL.UN-T], a hotel owner and franchisor; and General Donlee Income Fund [GDI.UN-T], which makes aircraft components. Armoyan's modus operandi is the same in almost every case: He quietly starts accumulating shares through his principal public investment vehicle, Clarke Inc. [CKI-T] Then, when he crosses the 10% threshold that requires him to publicly disclose his holding, he demands seats on the target's board of directors and input into management. The goal is to gain control and then engineer a turnaround, or sell off the company for a profit as soon as opportunity knocks." Why hard work doesn't pay 09/29/07   Economy "If you look at the averages, the statistics give a simple message: Hard work does not equate to economic progress. It hasn't for decades. We may need hard work to keep body and soul together -- not to mention pay the Visa bill -- but average-worker paychecks clearly show that inflation continues to trump wage gains for most American workers." Performance persistence of individual investors 09/29/07   Academia "We find that a substantial number of investors exhibit economically and statistically significant performance persistence. This is robust to how we measure past performance, how often investors trade and whether investors are small or large. Unlike the evidence from mutual and pension funds, the persistence in performance we uncover is not concentrated in investors with poor prior performance. We also show that forming a portfolio that is long in stocks previously favored by top performing investors earns a substantial risk adjusted return in the future." $1.4B tax scams nail donors 09/29/07   Taxes "Canada's coffers have been cheated of more than $1.4 billion by scams that provided taxpayers with inflated charitable receipts they used to reduce their income tax. From coast to coast, donors wrote cheques to charities and tax scheme promoters that boasted they were saving the deathly ill, the poor and disabled, overseas and in Canada. Now, at least 106,000 individual Canadians are learning the Canada Revenue Agency considers these schemes a sham, and wants to claw the money back. Some also are being hit with major financial penalties." Unsafe havens 09/27/07   Markets "Money market funds were invented 37 years ago to offer investors better returns than bank savings accounts while providing a high degree of safety. Most of the $2.5 trillion sitting in these funds is invested in such assets as U.S. Treasury bills, certificates of deposit and short-term commercial debt. Unlike bank accounts, money market funds aren't insured by the federal government. They almost never fail. Unbeknownst to most investors, some of the largest money market funds today are putting part of their cash into one of the riskiest debt investments in the world: collateralized debt obligations backed by subprime mortgage loans." Dreman interview 09/24/07   Dreman "I guess the key word is yet. I think we'll have some really major opportunities in the stock market. But I think there will be -- we'd like to see a little more unwinding. Actually, the stock market is fundamentally very strong." Absence of fear 09/24/07   Value Investing "There have been several studies as to how inflated housing prices had become prior to the present correction. According to the work done by Gary Shilling.s firm, home prices would have to correct between 22% and 28% to return to the equivalent of the median asking rent or to the trend line of the CPI. Prior to 1996, both of these measures approximated the rate of increase in home prices. According to Robert Shiller of Yale University, his real quality-adjusted existing house price index would have to correct nearly 45% to bring it back into alignment. My initial reaction to this estimate was one of disbelief and that it appears excessive; however, home prices would appear to have a considerable way to fall, given the high level of total homes available for sale. With nearly 4.5 million homes for sale in 2007, this compares to an average of approximately 2.5 million homes since 1990 or an excess of approximately 2 million homes. Since 1965, the median dollar volume of single-family homes sales as a percentage of nominal GDP has averaged 8.4% versus 16.3% at the 2005 peak, according to Northern Trust Global Economic Research." 'Toxic' mortgages are the best 09/23/07   Academia "Crazy? Not as crazy as you might think. The key, according to professors Tomasz Piskorski of Columbia Business School and Alexei Tchistyi of New York University's Stern School of Business, is that this kind of mortgage is optimal only in a perfect world - namely, one in which borrowers are fully rational and always do what's in their own best interest." [or why some theorists should stay away from real markets] New credit card scam 09/23/07   Crime "The caller asks you to look for seven numbers on the back of your card. He reads you the first four, which are part of your card number, and asks for the last three - the security numbers that verify you are the possessor of the card. When you give the security numbers, he says, "That is correct. I just needed to verify the card has not been lost or stolen and you still have it." The scam is effective because you say very little. The caller already has your credit card number, your address and the issuer's name and gives you all the information - except for the one piece he wants." When to pull trigger on a loss 09/23/07   Taxes "It makes most sense to sell to trigger a capital loss when at least one of the following is true: (1) you don't want to own the investment any more, or (2) you have capital gains in the current or a prior year that you'll be able to apply the losses against. Otherwise, think twice before selling." Wage wars 09/21/07   Law "In overtime cases, Depression-era laws aimed at factories and textile mills are being applied in a 21st century economy, raising fundamental questions about the rules of the modern workplace. As the country has shifted from manufacturing to services, for example, which employees deserve the protections these laws offer? Generally, workers with jobs that require independent judgment have not been entitled to overtime pay. But with businesses embracing efficiency and quality-control initiatives, more and more tasks, even in offices, are becoming standardized, tightly choreographed routines. That's just one of several factors blurring the traditional blue-collar/white-collar divide. Then there's technology: In an always-on, telecommuting world, when does the workday begin and end? The ambiguity now surrounding these questions is tripping up companies and enriching lawyers like Thierman." Too clever by 50 basis points 09/21/07   Markets "The past few weeks have shown that financiers did not fully understand what they were trading. The boom in derivatives was one of those moments when financial engineering raced ahead of back offices and risk-management departments, leaving them struggling to value or account for their holdings. Pierre Pourquery, of Boston Consulting Group, says it is not uncommon for investors to break their exotic purchases into smaller pieces in order to feed them into their risk-management systems. This brings new risks, particularly that the parts will behave differently from the whole under stress. Steven Schwarcz, a professor at Duke University and writer on securitisation, has come across contracts which are so convoluted that it would be impractical for investors to try to understand them: they would have to spend more money hiring experts to deconstruct them than they could ever hope to earn in extra returns." Warren Buffett: "I don't care" if the Fed cuts rates 09/18/07   Buffett "I represent a different view, maybe, than your other viewers. I don't think it makes any difference whatsoever to an investor in stocks what they do today. I don't care, I wouldn't care whether they raise the rate in terms of what I would do in stocks. If I knew exactly what they were going to do, I would not change a buy or a sell order that I have in." [Perhaps one of the silliest Buffett interviews I've seen. Who did they think they were interviewing?] Was Harry Potter inevitable? 09/17/07   Behaviour "The study's setup allowed for a very explicit test of social influence. The independent group, unswayed by the opinion of others, provided a reasonable indicator of song quality. If social influence is unimportant, you would expect the song rankings - and downloads - to be similar in all nine worlds. On the other hand, if social influence is important, small differences in the initial download pattern in the social worlds would lead to very different rankings. Cumulative advantage triumphs intrinsic quality. What did the study show? Well, song quality did play a role. A top-five song in the independent world had about a 50 percent chance of finishing in the top five for a social influence world. And the worst songs rarely topped the charts. Beyond that, the scientists found social influence played a huge part in success and failure. In the eight social worlds, the songs downloaded early in the experiment affected the songs downloaded later. Since the patterns of download were different in each social world, so were the outcomes. One song, "Lockdown" by 52metro, illustrates the point. The tune was ranked 26 in quality in the independent world, effectively average. Yet it was the number 1 song in one of the social influence worlds, and number 40 in another. Social influence catapulted an average song to hit status in one world and delegated it to the cellar in another." How bad debt infected the world 09/16/07   Markets "Cathy Busby has never met Mick Mayor. The 47-year-old hospital administrator from Colorado had no idea that when she fell behind with the mortgage payments on her three-bedroom home in the suburbs of Denver, it would stop Barclays extending the overdraft limit on Mayor's business four months later. But this is the true story of the global credit crunch. What seemed initially to be a problem in the US housing market is now forcing up the cost of borrowing in Britain, having swept from Denver to Darlington." TD Ameritrade suffers database breach 09/14/07   Brokers "TD Ameritrade Holding Corp. said Friday one of its databases was hacked and contact information for more than 6.3 million customers was stolen. A spokeswoman for the Omaha-based brokerage firm said more sensitive information in the same database, including Social Security numbers and account data, does not appear to have been taken." Crisis at Northern Rock 09/14/07   Stocks "Northern Rock, a former Newcastle building society taken public in 1997, thrived and then was brought down by its innovative business model. With a relatively small deposit base, it used securitization of mortgages and other capital-markets funding to grow rapidly to a nearly 19% share of the British mortgage market by the first half of 2007. But a few weeks ago, Northern Rock suddenly found that its various funding strategies were all shutting down simultaneously. In a crisis of confidence, the business model that had looked so good turned out to be no model at all." The folly of forecasting 09/14/07   Montier "One of the papers that didn't make it into the Behavioural Investing book (but with hindsight perhaps should have been added in) was on the performance of economists in forecasting recession. In it I pointed that economists are simply hopeless when it comes to forecasting recessions (I could have stopped that sentance before the word recessions). Their track record is truly appalling. The chart below shows that in recent history (1980 onwards) the consensus of economists has not managed to forecast either of the recessions that have occurred." Scam alert 09/11/07   Crime "Pratkanis says these telemarketers gain victims' trust by calling often, boosting their self-esteem and by bad-mouthing their children and other watchdogs. He offers some tips for countering a relative's allegiance to scammers and protecting against repeated rip-offs." The naked truth about tax shelters 09/09/07   Taxes "There's no shortage of promoters in Canada today who are happy to provide tax opinions on their strategies, written by reputable legal and accounting firms, and may even provide other evidence supporting the tax deductions or credits being claimed. The problem? Those opinions and that evidence is not worth the paper it's written on if the strategy should have been registered as a tax shelter with Canada Revenue but wasn't. If you're considering a tax strategy that's being marketed by a promoter, it's just as important to ask for a legal opinion on whether the strategy is defined to be a tax shelter (if no TSIN has been applied for) as it is to read the tax opinion on the strategy itself." Warren Buffett MBA Talk 09/08/07   Buffett See Warren's address to MBA students on You Tube in 10 parts. Dividend deluxe 09/08/07   Dividends "Brace yourself for this because it's powerful stuff. If you buy the shares of a dividend grower today, in a decade you could be enjoying a tax-efficient flow of income with a double-digit yield. Bonds and guaranteed investment certificates offered double-digit yields back in the early 1990s, but it's hard to see that happening again any time soon. Income trusts commonly offered double-digit yields at one time, but mainly the weaker names do today. Anyway, few trusts offer the same level of blue-chip quality as the best dividend growers." Debugging Wall Street's funky math 09/07/07   Accounting "In the first half of the year, most Wall Street firms awarded themselves large profits from assets that are rarely traded and difficult to price, according to numbers contained in the brokerages' recent financial statements. But, with markets seizing up since the end of June, those assets could be even harder to value, potentially prompting investors and regulators to question Wall Street's earnings." Index investing isn't passive 09/05/07   Montier "Just for the record, Bogleheads are die-hard devotees of index investing. Occassionally someone will mistake my criticisms of much of the active management industry for support of the Bogleheads' position. However, this isn't the case. In fact I reject pretty much all the foundations that index investing is built upon (see Chapter 35 of Behavioural Investing). The only exception is that the Bogleheads are quite right to point out the importance of minimising costs." Persistence of myths 09/05/07   Behaviour "The federal Centers for Disease Control and Prevention recently issued a flier to combat myths about the flu vaccine. It recited various commonly held views and labeled them either "true" or "false." Among those identified as false were statements such as "The side effects are worse than the flu" and "Only older people need flu vaccine." When University of Michigan social psychologist Norbert Schwarz had volunteers read the CDC flier, however, he found that within 30 minutes, older people misremembered 28 percent of the false statements as true. Three days later, they remembered 40 percent of the myths as factual. Younger people did better at first, but three days later they made as many errors as older people did after 30 minutes. Most troubling was that people of all ages now felt that the source of their false beliefs was the respected CDC." Confessions of a credit-card pusher 09/05/07   Debt "Politicians and college administrators are growing increasingly concerned about the damage that credit-card debt is causing students, and they're trying to crack down on some of the card companies' practices. They're limiting marketing on some campuses and trying to restrict the size of credit lines extended to students. Earlier this year, the state legislatures in Texas, Oklahoma, and New York moved to clamp down on credit-card marketing to college students" 2007 Wesco notes 09/04/07   Munger "Railroads - now that's an example of changing our minds. Warren and I have hated railroads our entire life. They're capital-intensive, heavily unionized, with some make-work rules, heavily regulated, and long competed with a comparative disadvantage vs. the trucking industry, which has a very efficient method of propulsion (diesel engines) and uses free public roads. Railroads have long been a terrible business and have been lousy for investors. We did finally change our minds and invested. We threw out our paradigms, but did it too late. We should have done it two years ago, but we were too stupid to do it at the most ideal time. There's a German saying: Man is too soon old and too late smart. We were too late smart. We finally realized that railroads now have a huge competitive advantage, with double stacked railcars, guided by computers, moving more and more production from China, etc. They have a big advantage over truckers in huge classes of business." The history of labor day 09/03/07   Government "Most of the world marks Labor Day on May 1 with parades and rallies. Americans celebrate it in early September, by heading to the beach or firing up the grill. Why the discrepancy? Here's a hint: The answer would have been a great disappointment to Frederick Engels." Bear bonanza 08/31/07   Markets "Earlier this year Prem Watsa, the gunslinging chief of Fairfax Financial, had $341 million riding on a hunch that dozens of brokers, banks and insurers could struggle paying their debts. Watsa has a history of making a killing on bearish bets. He sold half the company's stock holdings before the 1987 crash and bought puts against the S&P 500 before the index fell in 2000. But as summer began, his latest wager had produced nothing but losses. Then the credit markets seized up, and investors began clamoring for the Toronto insurer's collection of credit default swaps, basically insurance against bond defaults. Prices climbed. By the end of July Fairfax's swaps were worth $537 million, up 170% in a month." Take-home lessons on value investing 08/31/07   Value Investing "If price volatility isn't a proper measure of risk, fluctuations can afford an investor the opportunity to purchase a business for less than it's worth, according to value investors like Pabrai. When the market smells trouble and sends a stock's price down, value investors smell a potential overreaction and get to work valuing the business." A book-keeping error 08/31/07   Accounting "New research suggests that the increasing reach of fair-value accounting might be a mixed blessing. A paper by Guillaume Plantin of the London Business School, Haresh Sapra of the University of Chicago and Hyun Song Shin of Princeton University concludes that fair-value accounting could sometimes generate fluctuations in asset values that distort the very price information that it puts such store by." Why disciplined value investing is so difficult 08/29/07   Value Investing "Ask yourself a simple question, Jean-Marie Eveillard says. "If Warren Buffett is the second-richest man in the world, why aren't there more professional value investors?" In nature's casino 08/26/07   Markets "From Miami to San Francisco, the nation's priciest real estate now faced beaches and straddled fault lines; its most vibrant cities occupied its most hazardous land. If, after World War II, you had set out to redistribute wealth to maximize the sums that might be lost to nature, you couldn't have done much better than Americans had done. And virtually no one - not even the weather bookies - fully understood the true odds." A psychology lesson from the markets 08/26/07   Shiller "Many people feel that they have discovered their true inner genius as investors and have relished the new self-expression and excitement. Investors across the world have been thinking that they are winners - not recognizing that much of their success is only a result of a boom. Declines in asset prices endanger this very self-esteem. That is why it is so hard to turn around investor attitudes once a downward psychology sets in. The Fed and other central banks do not have lithium or Prozac in their bag of remedies, and so cannot control it." How rich friends make you feel poor 08/25/07   Thrift "Trying to live as if you have more money than you do may be one of the biggest causes of financial distress in America today, and nobody wants to talk about it." Fed bends rules to help two big banks 08/25/07   Markets "The regulations in question effectively limit a bank's funding exposure to an affiliate to 10% of the bank's capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, "that represents about 30% of Citibank's total regulatory capital, which is no small exemption," says Charlie Peabody, banks analyst at Portales Partners. The Fed says that it made the exemption in the public interest, because it allows Citibank to get liquidity to the brokerage in "the most rapid and cost-effective manner possible." So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle." Wells Fargo gorges on mark-to-make-believe gains 08/22/07   Accounting "The board last September approved a new, three-level hierarchy for measuring 'fair values' of assets and liabilities, under a pronouncement called FASB Statement No. 157, which Wells Fargo adopted in January. Level 1 means the values come from quoted prices in active markets. The balance-sheet changes then pass through the income statement each quarter as gains or losses. Call this mark-to- market. Level 2 values are measured using 'observable inputs,' such as recent transaction prices for similar items, where market quotes aren't available. Call this mark-to-model. Then there's Level 3. Under Statement 157, this means fair value is measured using 'unobservable inputs.' While companies can't actually see the changes in the fair values of their assets and liabilities, they're allowed to book them through earnings anyway, based on their own subjective assumptions. Call this mark-to-make-believe." The evolution of the idea of 'value investing' 08/21/07   Value Investing "Benjamin Graham and David L. Dodd's Security Analysis, first published in 1934, brought structure and logic to the field, creating an intellectual framework for sound investment. In an area where much looks foolish shortly after publication, Graham's principles have proved reliable for over sixty-five years." Housing woes hit high end 08/20/07   Real Estate "The jumbos are probably a bigger impediment than fear. The term refers to home loans in excess of $417,000. By rule, they cannot be guaranteed by the government-sponsored mortgage finance companies Fannie Mae and Freddie Mac. Of late, if Fannie or Freddie aren't vouching for your loan, there's trouble. As with most mortgages, jumbos are typically bundled together by lenders and then resold to investors (often mutual or pension funds) as mortgage-backed securities. The problem: The rising number of defaults on subprime mortgages -- particularly among borrowers who took out interest-only or other exotic loans -- has laid bare the, um, less than diligent practices of many lenders. That has spooked investors and dried up the secondary market for mortgages -- even those of sterling quality -- that aren't guaranteed by Fannie or Freddie. Unable to resell their jumbo mortgages on Wall Street, lenders are now making far fewer mega-loans, and those they are making charge much more onerous interest." The escape of the enablers 08/20/07   Government "Wall Street loves to talk about letting financial markets weed out the weak. But when the Street itself gets in trouble, it sticks out its little tin cup, asking for help. And gets it. The subprime-mortgage-market meltdown is a classic example of the way small fry get devoured, but the whales of Wall Street get rescued. Here's the deal: People with crummy credit who took out mortgages are being allowed to fail in record numbers. The mortgage companies that made those loans are being allowed to fail. The Street itself? It's bailout city. Even before the Fed made a symbolic half-point cut in the discount rate, it and other central banks from Switzerland to Singapore were trying to rescue the Street by injecting hundreds of billions of dollars into the financial markets and announcing they will put up more, if needed." Tough love on Wall Street 08/20/07   Gross "The past few weeks have exposed a giant crack in modern financial architecture, created by youthful wizards and endorsed for its diversity by central bankers present and past. While the newborn derivatives may hedge individual institutional and sector risk, they cannot eliminate the Waldos. In fact, the inherent leverage that accompanies derivative creation may foster systemic risk when information is unavailable or delayed in its release. Nothing within the current marketplace allows for the hedging of liquidity risk, and that is the problem at the moment. Only the central banks can solve this puzzle, with their own liquidity infusions and perhaps a series of rate cuts. The markets stand by with apprehension." Crisis counsel 08/18/07   Markets "In one way, I'm sympathetic to the institutional reluctance to face the music. I'd give a lot to mark my weight to "model" rather than to "market."" Hedge-fund guy atones for his subprime bond sins 08/16/07   Fun "Dear investor, we'd like to take this opportunity to update you on the recent performance of our hedge fund, Short-Term Capital Mismanagement LLP. As you know, market selection for the entire fund is guided by a proprietary investing tool we like to call "a dartboard." Once the asset classes are decided, individual security selections are generated by digitizing our unique hexagonal cuboid models. Unfortunately, it transpires that our hexagonal cuboids are not as unique as we thought. Hundreds of other hedge funds possess identical dice. The technical term for this is a "crowded trade." You may also see it referred to as "climbing on a bandwagon already headed for the wall."" Viscusi interview 08/15/07   Law "So, for instance, in the case of Superfund cleanups of hazardous wastes, the people who benefit from the cleanups are not paying the costs directly and thus demand the most stringent standards possible. The result is that the median cost per cancer case averted is about $7 billion. It's off the charts because you are using the responsible parties' money to clean up the site. In contrast, if you look at the amount of money people are willing to pay for houses that are not exposed to hazardous waste risks, you don't observe that kind of large trade-off at all." 'Uptick' rule change an opportunity 08/15/07   Markets "The old SEC rule said that short selling could only be done at a price higher than the last traded price. It was instituted to eliminate the "bear raids" of the roaring 1920s, when well-financed stock operators would come out with wave after wave of short selling at ever lower prices. This spiralling price fall would give the raiders the chance to buy back their shorted shares from panicked sellers, and go home richer at the expense of the uninformed masses. The "sell on uptick" rule eliminated such bear raids, with some exceptions. One was in commodities, where you can short at any price, and another was for some brokers, in some cases. The last one is important because it helped cause the 1987 crash, through "portfolio insurance," which gave investors dyspepsia and a buying opportunity, same as it might in the near future." What most don't know about P/E ratios 08/14/07   Graham "Today, the Graham-Dodd approach produces a very different picture from the one that Wall Street has been offering. Based on average profits over the past 10 years, the P/E ratio has been hovering around 27 recently. That's higher than it has been at any other point during the past 130 years, except for the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off." The Income 100 08/13/07   Stingy Investing "A year ago we helped you target Canada's best income trusts in our second All-Canadian Trust Guide. We ranked the largest trusts in Canada and assigned each a letter grade depending upon how its financial numbers stacked up. Despite the carnage in the trust sector as a result of new tax rules introduced in late 2006, our picks hit the bulls-eye. Our top-flight trusts - those rated either A or B - gained an average of 11.7% over the past year. That continues a streak of strong performance. Since we started ranking trusts in 2005, our top trusts have gained a total of 44.9%." In the risk-reward game, Hartco worth holding 08/12/07   Value Investing "A general rule of investing is the higher the potential rate of return, the greater the degree of risk. One way that this relationship expresses itself is when people chase yield. We did exactly that with our purchase of Hartco Corp. at prices from $3.02 to $3.46 over the past year or so." Stealing from the dead 08/11/07   Crime "In March 2006, the Tennessee board that regulates cemeteries got a five-page complaint, in neatly penned cursive longhand, from Geraldine Story, an elderly Memphis woman. Story's husband Ralph had died on January 22. In preparation for that day, he and she had each, more than thirty years earlier, purchased prepaid funeral services from the Forest Hill Funeral Home in Memphis, to make sure that each's burial expenses would not be a burden to the other or to their families. Six hours before her husband's wake, however, Story learned that the casket would not look anything like the bronze one promised in the contract. Instead, it would be made of brown painted wood, with "a single latch on the lid that resembled a cheap tool box," as she wrote. If she wanted an upgrade, the least expensive alternative would run $3,995.00. She bought that one, of course, but after the funeral she followed up and was eventually told by a candid funeral home staffer that the funds set aside to fulfill her contract had been "skimmed off the top several times," and now the home was stuck with more than 13,000 "pre-need" contracts just like hers with no way to pay them. "He said they had to operate the way they are doing," she wrote, "or go out of business in two months and we don't want that, do we?" The then-unraveling scam that victimized Ms. Story turned out to be worse than that, even. The same folks who looted Forest Hills, according to Michigan authorities, were also looting trust funds from 28 cemeteries in that state (including the final resting places of Rosa Parks and Henry Ford)." A world of winners, Warren's way 08/11/07   Buffett "We have been running this screen for more than 12 years. Since its inception on Feb. 13, 1995, through July 31, 2007, the screen has had an annualized return of 15.69% vs. 9.28% for the Standard & Poor's 500-stock index. Year-to-date through July 31, 2007, the Buffett screen stocks outperformed the market, returning 7.69% vs. the 2.61% gain for the S&P 500 (all results are price appreciation only)." Tend to overanalyse stocks? 08/11/07   Buffett "Contrast this with the investment process of Warren Buffett and his partner, Charlie Munger. Their record is astounding, yet they have no analysts on staff to crank out spreadsheets or discounted cash flow valuations. I'm not even sure these two guys know how to use Microsoft Excel to model financial projections (probably not). How can two people out-research a staff of 100 highly-trained CFAs using the latest and greatest computer technology? The answer is that Buffett and Munger are able to filter out the noise better than just about anyone else." Bill Miller Q2 Letter 08/11/07   Miller "Owning housing stocks in the midst of the worst housing market in at least 15 years, and one where the problems may linger until 2009, may prompt a reaction similar to that one client had when we bought a company in the midst of a scandal: don.t you read the papers? At LMCM we actually try to buy low and sell high, and you don.t buy low when everything is great and the headlines reflect it. Usually, but not always, when you read about some industry or company having the worst time since some period of years, or even decades ago, you will find that buying that industry or company when it was going through those difficulties proved quite profitable if your time horizon wasn.t measured in days or months. The headlines today are all about this being the worst housing market since the early 1990.s. Had you bought housing stocks during that previous period of duress, you would have made many times your money and handily outperformed the market over the subsequent decade." The perils of joint ownership 08/05/07   Taxes "What you should avoid, however, is giving the last laugh to someone who, against your intentions, inherits some of your assets when you're gone. If you're not careful, joint ownership can cause this problem. Let me share three stories to help explain." Prem Watsa Intelligent Investing Lecture 08/05/07   Value Investing "The topic of Mr. Watsa's keynote speech was Ben Graham and Bubbles." Making money the Warren Buffett way 08/04/07   Buffett "When an investor amasses $52 billion over half a century, humble stock pickers take note. When he's Warren Buffett, the homespun "Oracle of Omaha," it not only pays to heed his thinking, but it's fun." How the brain busts the budget 08/01/07   Health "Sure, persistent money troubles can cause the blues -- but sometimes it's the other way around. Many common disorders can lead to financial woes." No assembly required 07/30/07   Stingy Investing "Many of us would love to become landlords - if it just weren't for those darn tenants. Every prospective landlord hears stories about deadbeat tenants who skip town without paying the rent. And even if you have good tenants, the life of a property entrepreneur isn't easy. Nothing takes the shine off a potential investment faster than the thought of fielding complaints at two in the morning about clogged toilets or devoting part of your weekend to fixing the broken-down washing machine at your rental property. Fortunately, there is an easier way to become the next Donald Trump. Rather than buying rental units directly, why not invest in property through Real Estate Investment Trusts?" Company cars: Perk or penalty? 07/30/07   Taxes "Whether it makes sense to drive a vehicle provided by your employer or to provide your own vehicle for use in your work comes down to a number-crunching exercise. Your best bet is to have an accountant do the math for you, but there are some general guidelines that apply." Outdoing the Swiss Army knife 07/25/07   Management "Long before holstered cellphones appeared on handymen's belts, another gadget won their hearts and hips: the Leatherman Pocket Survival Tool. Within three months of its first listing in a mail-order catalog, the multifunctional gizmo became essential for thousands of hikers, hunters, and knife enthusiasts. Since then, Leatherman tools have blasted into space with NASA astronauts, severed umbilical cords on newborns, and extracted shrapnel from American troops in Iraq. As founder Tim Leatherman tells it, the idea behind his company grew out of a routine car breakdown. He and his wife spent most of 1975 touring Europe and Asia in a used Fiat. Its hoses leaked and the wiring failed constantly, and Leatherman's generic pocketknife lacked the means to fix them. Inspiration struck: Why not add pliers to a pocketknife? By the time the couple returned to the U.S., Leatherman had sketched out a design. A few weeks later he was using his brother-in-law's machining tools to construct the first prototype." Dead men farming 07/25/07   Government "Here's a fact that supporters of the Farm Bill might want to consider as the legislation is deliberated on the House floor this week: Between 1999 and 2005, the U.S Department of Agriculture paid $1.1 billion in farm payments to nearly 173,000 people who weren't alive. Nothing illegal--just Washington business as usual. Under certain conditions, estates can receive farm payments for up to two years after a recipient's death. But according to a study released Tuesday by the Government Accountability Office, 40% of the deceased who received payments from 1999 to 2005 had been dead for at least three years. In one instance, someone who died in 1995 got $400,000." The value of Fundamental Indexing 07/25/07   Value Investing "Proponents of market benchmarks weighted by such factors as dividends, earnings or sales claim that an investment management revolution is afoot. But is the concept really new - or is it just a cleverly repackaged version of the discipline known as value investing?" Profiting from mortality 07/24/07   Bonds "Death bonds may be the most macabre investment scheme ever devised by Wall Street" Why rent? To get richer 07/22/07   Real Estate "Shares return 7% a year after inflation because that's how fast companies tend to increase their profits. Houses have their own version of profits: rents. Tenant-occupied houses generate actual rents, while owner-occupied houses generate ones that are implied but no less real: the rents their owners don't have to pay each year. House prices and rents have been closely linked throughout history, with both increasing at the rate of inflation, or about 3% a year since 1900. A house, after all, is an ordinary good. It can't think up ways to drive profits like a company's managers can. Absent artificial boosts to demand, house prices will increase over long periods at the rate of inflation, for a real return of zero." Crooks with deep pockets 07/22/07   Crime "Berger's case is one example of how difficult it can be for authorities to track down white-collar fugitives. They have advantages that more typical criminals lack, including ties to foreign countries, advanced degrees, and barrels of money that can help secure safe havens. Berger, now 35, was born in London and grew up in Salzburg, Austria. He managed hundreds of millions of dollars out of Park Avenue offices in New York before authorities charged him with misleading investors about his stockpicking prowess. Even as he reported stellar returns to his backers, Berger was hemorrhaging more than $400 million by betting against Internet stocks in the late 1990s. Using his connections and his persuasiveness, Berger was able to avoid legal authorities for years." What's luck got to do with it? 07/18/07   Miller "Somebody once asked Bill Ruane [the late manager of the legendary Sequoia Fund], and I happened to be in the audience that day, "How do you learn about investing?" And Bill said, "Well, if you read Ben Graham's Security Analysis and The Intelligent Investor you'll be well versed in it. And then if you read Warren Buffett's shareholder letters and understand them too, you'll know everything there is to know about investing. And you will become a successful investor." And I think Bill was right, but it takes a lot of time to do that. Puggy Pearson made it a little pithier when he said, his line was, "There ain't only three things to gambling. Knowing the 60/40 end of a proposition, money management, and knowing yourself."" Six books you need to make money 07/17/07   Books "Knowing how to invest is a life skill that can pay off big. If you're just getting into the game though, learning how to play the markets to your advantage can be complicated. The books below tell you what you need to know to make money, without a lot of financial terminology. They're not your typical textbooks - they're as fun as they are informative, and must reads for anyone interested in business and investing." How to earn $1 million by not watching TV 07/17/07   Thrift "A recent study found that it would take $1 million for someone to be willing to give up TV for the rest of their lives. Guess what? If you decided to give up TV and invested the money you saved, you would get that $1 million -- and probably a lot more." Another pounding 07/15/07   Markets "The current fear is not so much that the housing market could drive America into recession, although that could still happen. The worry is more that credit conditions may get tighter. The spread paid by higher-risk European firms has increased by almost a percentage point since mid-June. Investors are shying away from some loans being offered to finance leveraged buy-outs. A slowdown in such private equity-driven bids would hit the stockmarket." Bear Stearns' collateral damage 07/13/07   Markets "The implosion of a hedge fund often sheds some unwanted attention on the wealthy investors who chose to sink money into the venture. That's certainly the case with an 11-month-old Bear Stearns hedge fund that bet heavily on risky bonds backed by subprime mortgages and is teetering on the verge of collapse" Scale effects in mutual fund performance 07/10/07   Funds "Our study examines the role of trading costs as a source of diseconomies of scale for mutual funds. We estimate annual trading costs for a large sample of equity funds and find that they are comparable in magnitude to the expense ratio; that they have higher cross-sectional variation that is related to fund trade size; and that they have an increasingly detrimental impact on performance as the fund's relative trade size increases. Moreover, relative trade size subsumes fund size in regressions of fund returns, which suggests that trading costs are the primary source of diseconomies of scale for funds." Money isn't everything 07/10/07   Behaviour "Psychologists have known for a long time that economists are wrong. Most economists - at least, those of the classical persuasion - believe that any financial gain, however small, is worth having. But psychologists know this is not true. They know because of the ultimatum game, the outcome of which is often the rejection of free money." The OSC fraud squad 07/10/07   Government "Wow. Stop the presses. Suspected scam artists are being asked to take a two-week summer holiday. Meanwhile, the organizations in question are still lining up potential suckers." Robot stock portfolio rides high again 07/10/07   Dorfman "Our picks by the data machine for 2007 each had a market value of more than $500 million, more than a penny of profit per share in the latest four quarters reported, more shareholder equity than debt and the lowest share price on the market relative to recent earnings." Income transfers can backfire 07/07/07   Taxes "The only thing that might hurt more than paying double the cost is being double-taxed. Subsection 56(4) of Canadian tax law can cause this problem if you're not careful." What's up with all those tip jars? 07/07/07   Thrift "Am I alone in taking pointed notice of all the tip jars that have blossomed on business countertops? From delis to pizzerias, Chinese takeout joints to barbershops, the word has spread like wildfire: If you put out a tip jar, people will fill it. Well, maybe they will, but I have yet to be shamed (if this is the right word) into casting my coin into the tip jar fountain. Perhaps it is the scientist in me, but I try to reason the situation out like this: I call in my order to the Chinese restaurant. I drive there to pick it up. I pay the menu price. Why on earth would I pay more than they are asking for their product? Doing so strikes me as positively un-American. Tipping used to be confined to service-oriented occupations: waitresses, taxi drivers, doormen. Now it has spread to businesses where I seem to be doing most of the work." Attack of the mutant rice 07/07/07   Health "America's rice farmers didn't want to grow a genetically engineered crop. Their customers in Europe did not want to buy it. So how did it end up in our food?" Florida foreclosure future shock 07/07/07   Real Estate "A tidal wave of foreclosures may be heading toward Florida, if you judge by the number of homeowners looking to get rid of their homes as fast as they can. Duane LeGate, president of House Buyer Network, arranges quick sales for home owners in distress. He claims he can predict where markets will go bad by looking at the traffic on his Web site. "We can tell you what's going to happen nine months from now," he said. His most endangered market right now is Orange County, Florida, home of Disney World." How Buffett bounces back 07/02/07   Buffett "Thousands have studied the success of Warren Buffett, the chairman and CEO of Berkshire Hathaway (BRKA). And for good reason: The value of Berkshire stock increased 361,156% from 1964 to 2006. But the country's most famous investor has made some infamous mistakes, too. Buffett's blunders offer their own lessons to investors trying to emulate the "Sage of Omaha."" Charlie Munger's 2007 commencement address 07/02/07   Munger "Safest way to get what you want is to deserve what you want. Deliver to the world what you would buy if you were on the other end. There is huge pleasure in life to be obtained from getting deserved trust. And the way to get it is to deliver what you would want to buy if the circumstances were reversed." A virtuous cycle 07/01/07   Management "In 18th- and early 19th-century Britain a sizable chunk of the nation's economy was run by members of the religious sect known as the Quakers. Quakers owned more than half of the country's ironworks. They were key players in banking (both Barclays and Lloyds were Quaker institutions). They dominated consumer businesses like chocolate and biscuits. And they were instrumental in facilitating the transatlantic trade between Britain and America. Initially their success was built around the benefits Quakers got from trading with one another. Because they dissented from the Church of England, members of the sect were barred from the professions and as a result gravitated toward business. When Quakers went looking for credit or for trade, then, they found it easy to partner with fellow believers. Their common faith facilitated trust, allowing a Quaker tradesman in London to ship goods across the ocean and be certain that he would be paid when they arrived in Philadelphia. Quaker prosperity did not go unnoticed by the outside world. They were well known already for their personal emphasis on absolute honesty, and as businessmen they were famously rigorous and careful in their recordkeeping. They also introduced innovations like fixed prices, which stressed transparency over sharp dealing. All of this clean living, as it were, paid off. Soon, people outside the sect began to seek out Quakers as trading partners, suppliers and sellers. And as Quaker prosperity grew, people drew a connection between that prosperity and the sect's reputation for reliability and trustworthiness. In the long run, observant businessmen came to see, being trustworthy was more lucrative than being Machiavellian. Honesty was the best policy." Justices end 96-year-old ban on price floors 07/01/07   Law "Striking down an antitrust rule nearly a century old, the Supreme Court ruled today that it is no longer automatically unlawful for manufacturers and distributors to agree on setting minimum retail prices. The decision will give producers significantly more leeway, though not unlimited power, to dictate retail prices and to restrict the flexibility of discounters." The bargain basement isn't empty 07/01/07   Value Investing "Jeremy J. Siegel, a professor of finance at the Wharton School of the University of Pennsylvania and an adviser to WisdomTree Asset Management, is also a believer. He said that value stocks "have been bid up a bit more than they have in the past," but that "it is not a time to abandon value and go for growth. In the long run, value stocks have done better."" It's intent that counts in loss claims 07/01/07   Taxes "My four-year-old son Michael set up a lemonade stand at the end of our driveway and made $2.75 (selling lemonade to my wife Carolyn and me ). Excitedly, he asked: "Dad, can we go to the store to buy some candy?" "Wait a minute," I replied. "You earned $2.75, but the lemonade cost $1.75, and the plastic cups cost $2. By my calculations that means you actually lost $1. And to make matters worse, when you claim that loss on your tax return, Canada Revenue might say you weren't carrying on a commercial activity, and deny the loss." Michael looked at me with a blank stare." Don't buy that house 07/01/07   Real Estate "The dream of owning your own home is as American as apple pie--and (supposedly) better for you. Over and over, we are told that homeownership will make you happier, healthier and wealthier. Heck, it's even supposed to make you a better citizen. Of course, there are times when, depending on your age, your savings and your income, buying a home can be a smart decision and an excellent way to build wealth. But is buying a home really such a universally good idea?" 2007 Whitman Lecture 06/30/07   Whitman "Mr. Whitman has agreed to talk about three issues (1) What is Safe & Cheap Investing (2) Advantages of Safe & Cheap Investing, and (3) Problems with Safe & Cheap Investing." Blowing up 06/27/07   Markets "How Nassim Taleb turned the inevitability of disaster into an investment strategy." Bear's big loss arouses SEC interest 06/25/07   Bonds "Bear Stearns told investors May 15 that the Enhanced Leveraged fund - which raised $642 million last summer - had lost 6.5% in April. But three weeks after that estimate, the investment firm shocked investors on June 7, telling them that the fund's actual April loss was 18.97%, or 23% for the year" Nassim Taleb Lecture: The Black Swan 06/24/07   Markets "Nassim Nicholas Taleb has devoted his life to immersing himself in problems of luck, uncertainty, probability, and knowledge. Part literary essayist, part empiricist, part no-nonsense mathematical trader, he is currently the Dean's Professor in the Sciences of Uncertainty at the University of Massachusetts at Amherst. His last book, the international bestseller Fooled by Randomness, has been published in eighteen languages." Tight times for deep value investing 06/22/07   Value Investing "Barbee keeps a watch-list of companies with share prices trading below book value, or net worth (essentially, a company's assets minus liabilities). When the overall market bottomed in late 2002 and early 2003, Barbee found that some 500 stocks were trading below book value (he screens for all stocks with market values of $70 million and up). By early 2004, the number had shrunk to about 100 and has stayed there ever since. "Everyone's had a chance to sift through the bathwater," Barbee says. As for the remaining bargain-bin merchandise, the average discounts are not as large as they once had been, and the quality of the typical company is not as strong." What else is new? 06/21/07   Books "Old technologies persist; they even flourish. In that sense, they're as much a part of the present as recently invented technologies. It is said that we live in a "new economy," yet, of the world's top thirty companies (by revenue), only three are mainly in the business of high tech - General Electric (No. 11), Siemens (No. 22), and I.B.M. (No. 29) - and all three go back more than a century. The heights of the early-twenty-first-century corporate world are still occupied - as they have long been - by petroleum companies (Exxon Mobil, Royal Dutch Shell, and B.P., Nos. 1, 3, and 4), retailing (Wal-Mart, No. 2), automobiles (General Motors, No. 5), and finance (I.N.G. and Citigroup, Nos. 13 and 14). No Hewlett-Packard (No. 33); no Microsoft (No. 140); no Merck (No. 289)." Eveillard: A value maestro's encore 06/19/07   Value Investing "For almost 30 years, global fund manager Jean-Marie Eveillard made a lot of money bucking trends. After a two-year break, he's back." How to run a budget like an idiot 06/18/07   Government "Before every red-blooded tax loather spits on this page in disgust, consider the context. Over the past six years we've borrowed nearly $2 trillion to cut taxes for the wealthiest during a time of war, meaning we've slipped the bill for our war and our tax cuts to our kids. How do the candidates - who also claim to be "fiscally conservative" (not to mention devotees of "family values") - square all this?" In a rocky stock market, play it safe 06/18/07   Value Investing "Up and down Wall Street, traders' screens are green, signaling that these are great times for stock market investors. The S&P 500 and the Dow Jones Industrial average are setting all-time highs. So much cash is sloshing around the sidelines, and borrowing costs are so low, that practically each day brings news of asset sales or corporate takeovers. Reuters. Chrysler. Stuyvesant Town. MGM. It all seems like the late 1990s." Bill Gross's British stamps outperformed Pimco fund 06/18/07   Gross "Bill Gross's British stamps, which go on auction in New York on June 11 to benefit a charity, have proven to be a better investment than his bond fund. The manager of the world's largest bond fund stands to raise $5 million or more from the stamps he bought for $2 million, mostly in 2000, said Charles Shreve, Gross's stamp adviser. His $104 billion Total Return Fund had a 6.9 percent average annual return in the past 10 years, according to Morningstar Inc. data." You got your tissues in my peanut butter 06/18/07   Behaviour "Indeed, many shoppers are repulsed by the thought that packages of food are touching items such as toilet paper, feminine hygiene products, cat litter, or even, in some cases, mayonnaise - all items that subconsciously repulse a lot of people." Some 'value' stocks are just losers 06/17/07   Value Investing "Most veteran value investors have a story about the stock they wished they had let get away. The shares looked attractive and the company's worst troubles seemed behind it. But instead of a quick fix, they got quicksand; the stock languished, a waste of money and time. For John Linehan, manager of the T. Rowe Price Value Fund, such disillusionment comes from a stake in Boston Scientific. The medical-device company appeared to have healthy demand for its products and its costs were under control, he says, but tough competition and an expensive acquisition of heart-device maker Guidant has proved otherwise." Coal? Yes, Coal 06/15/07   Stocks "Little known outside the energy industry, Peabody is well respected within it. The company is often referred to as the "Exxon of Coal" for its strategic judgment and its immense energy resources. Peabody's 10.2 billion-ton coal pile has nearly twice the energy content of Exxon's petroleum reserves. Its massive mines in Wyoming's Powder River Basin are among the most productive and technologically sophisticated in the world. And its well-timed acquisitions of properties in Australia have proved rewarding, forging a valuable path into fast-growing markets such as India and China. International business now contributes 30% of profits, up from under 1% in 2001." A legend sizes up the market 06/15/07   Funds "Miller remains one of the sharpest, most innovative thinkers in the investing game, as we were reminded during a recent interview at Legg Mason's headquarters, next to Baltimore's striking Inner Harbor. Miller is particularly impressive when he argues about the foibles of most value investors and defends his own approach. In the late 1990s, he was criticized for being a value investor in name only because he owned shares of AOL, Dell and Amazon.com. Today, his big stake in Google once again leads some to question his credentials as a bargain hunter." Freedom, not climate, is at risk 06/15/07   World "As someone who lived under communism for most of his life, I feel obliged to say that I see the biggest threat to freedom, democracy, the market economy and prosperity now in ambitious environmentalism, not in communism. This ideology wants to replace the free and spontaneous evolution of mankind by a sort of central (now global) planning. The environmentalists ask for immediate political action because they do not believe in the long-term positive impact of economic growth and ignore both the technological progress that future generations will undoubtedly enjoy, and the proven fact that the higher the wealth of society, the higher is the quality of the environment. They are Malthusian pessimists." Globalization erodes product safety 06/14/07   World "Colgate's announcement Thursday that it found fake and potentially dangerous "Colgate"-branded toothpaste sold in some stores is the latest in a series of product scares that have recently spooked American consumers. More importantly, these incidents of counterfeit toothpaste, melamine-tainted pet food and toothpaste laced with anti-freeze imported from China are raising concern about the quality of food and other products that enter the U.S. and the overall safety of the global supply chain." Bear Stearns' hunt for big cash 06/14/07   Bonds "The rise in mortgage defaults - particularly in the subprime market - ultimately will impair the value of many bonds that are backed by those risky home loans. But up until now, most bondholders have not have had to readjust their valuations for those mortgage-backed securities. Bond investors are not required to reduce the value of a bond unless it's either downgraded by a credit rating agency or sold for a reduced price in the secondary market. But traders are speculating that the big bond sale by Bear Stearns may set the stage for a second sale, this one involving a batch of poor performing mortgage bonds. If that were to occur, other hedge fund managers might be forced to mark down the value of some of their mortgage-related investments. That's clearly something bond bears are rooting for." Warren Buffett timeline 06/08/07   Buffett "A Chronological History of the Oracle of Omaha: 1930-1989" Monte Carlo may be answer to closet indexing 06/08/07   Funds "Performance evaluations can be unsatisfactory when basing them on peer groups because a manager can beat one group while underperforming another. A further drawback is that it can take years, even decades, to determine whether a manager's results reflect skill or luck. Only the likes of Warren Buffett possess such patience. Ronald Surz, president of San Clemente, California-based software company PPCA, has a possible solution for investors who want to measure performance and still escape what Montier calls 'the tyranny of the benchmark.' He recommends using Monte Carlo simulation to construct multiple scenarios that show where an individual money manager falls among a distribution of thousands of possible investment outcomes." 2006 Chou Lecture 06/06/07   Chou "While working as a technician for a phone company in 1981, he started an investment club that would later become the Associates fund. Mr. Chou has operated two of the country.s most successful funds, Chou Associates Fund and Chou RRSP fund, for the last 18 years." Benefiting from irrational investors 06/06/07   Behaviour "If you're like most people, you probably don't spend a great deal of time monitoring your investments. So when another company uses stock to acquire a firm in which you hold a stake, what do you do with the new shares you suddenly own of a company that you never intended to buy in the first place? Logic suggests that you would be likely to sell those shares. But research by Associate Professor Malcolm Baker, Professor Joshua Coval, and Harvard University professor Jeremy C. Stein shows that 80 percent of individual investors and 30 percent of institutional investors appear to be more inertial than logical. They take the default option, passively accepting the shares offered as consideration in stock mergers and acquisitions." What I learned from 'The Price Is Right' 06/06/07   Behaviour "Bob Barker, who is taping his final "Price" episode today for broadcast June 15 on CBS, was one of my childhood idols. He was impeccably tailored, and he genuinely engaged the contestants, even when the outrageously T-shirted hoi polloi didn't match the effortless grace of the host. More important, watching "The Price Is Right" taught me an enormous amount about money. Naturally, I loved the showcases, the cars and "Barker's Beauties." But what kept me coming back was the daily lesson in the principles of behavioral finance. If you wanted to know how to exploit - or get trapped by - market inefficiencies and the often irrational behavior of competitors, "The Price Is Right" was essential." Smothered by six sigma? 06/04/07   Management "Now his successors face a challenging question: whether the relentless emphasis on efficiency had made 3M a less creative company. That's a vitally important issue for a company whose very identity is built on innovation. After all, 3M is the birthplace of masking tape, Thinsulate, and the Post-it note. It is the invention machine whose methods were consecrated in the influential 1994 best-seller Built to Last by Jim Collins and Jerry I. Porras. But those old hits have become distant memories. It has been a long time since the debut of 3M's last game-changing technology: the multilayered optical films that coat liquid-crystal display screens. At the company that has always prided itself on drawing at least one-third of sales from products released in the past five years, today that fraction has slipped to only one-quarter." Make Benjamin Graham proud 06/02/07   Graham "Today we'll get some help from Bob Tattersall, executive vice-president of Howson Tattersall Investment Counsel, and Benjamin Graham, the dean of value investing. Mr. Tattersall suggests a value screen based on what Mr. Graham calls net current asset value. Mr. Graham defined this screen as working capital minus all obligations, including preferred stock." Turtles in Omaha 05/31/07   Buffett "Most of us frame the success or failure of a financial proposition in terms of the price. For instance, if you buy a stock at $30, any price above that level is mentally successful; any price below it is mentally unsuccessful. What investors often fail to consider is that change in wealth is not a function of how often you're right, it's a function of how much money you make when you're right versus how much you lose when you're wrong. You need to consider both frequency and magnitude to understand investment results. Faith illustrates this point by sharing 20 years of results for a trading system. Over that time span, the system generated about 5,600 trades, or around 250 a year. Of those trades, a shade over two-thirds lost money, making the success ratio less than one-third. But the winning trades earned 2.2 times the losing trades on average, netting a substantial overall profit." It feels good to be good 05/29/07   Behaviour "The results were showing that when the volunteers placed the interests of others before their own, the generosity activated a primitive part of the brain that usually lights up in response to food or sex. Altruism, the experiment suggested, was not a superior moral faculty that suppresses basic selfish urges but rather was basic to the brain, hard-wired and pleasurable." Top 20 questions from 2007's meeting 05/27/07   Buffett "The measurement of volatility: it's nice, it's mathematical, and wrong. Volatility is not risk. Those who have written about risk don't know how to measure risk. Past volatility does not measure risk. When farm prices crashed, [farm price] volatility went up, but a farm priced at $600 per acre that was formerly $2,000 per acre isn't riskier because it's more volatile. [Measures like] beta let people who teach finance use the math they've learned. That's nonsense. Risk comes from not knowing what you're doing. Dexter Shoes was a terrible mistake. I was wrong about the business, but not because shoe prices were volatile. If you understand the business you own, you're not taking risk. Volatility is useful for people who want a career in teaching. I cannot recall a case where we lost a lot of money due to volatility. The whole concept of volatility as a measure of risk has developed in my lifetime and isn't any use to us." Fairfax braces for meltdown 05/27/07   Value Investing "Prem Watsa says investors around the world are not being paid enough for the inherent risk in stocks, bonds and real estate. The chair of Fairfax Financial Holdings Ltd. is not crying poor for successful capitalists like himself, though. He is sounding a warning call to investors, big and small. The renowned but recently embattled sleuth of under-valued assets . an acolyte of Depression-era investment theorist Benjamin Graham . has acted on his concern to protect his stable of general insurance and re-insurance companies." Why bubbles are great for the economy 05/23/07   Markets "If you blew the kids' college fund on Pets.com stock back in 2000, or dropped $800,000 last year on that spec house in Phoenix that you knew you could flip for $1.4 million, you probably won't believe me when I say: Investment bubbles are great for the economy. Yes, those periodic outbursts of investor insanity, which inevitably degenerate into venality, corruption, and searing losses - America needs them!" Buffett's Squanderville all maxed out 05/23/07   Buffett "Buffett makes his point with an economic model dressed as storytelling. He invites his audience on "a wildly fanciful trip to two isolated, side-by-side islands of equal size, Squanderville and Thriftville". Squandervillians live it up by borrowing from Thriftville - something they can keep doing until they've mortgaged all their assets, including their land. This process could go on a long time before the market forces an adjustment. And by then, what damage might have been done to Squanderville's economic future, not to mention its strategic position with its financier Thriftville" Picks from Berkshire's portfolio 05/23/07   Buffett "At this year's Berkshire Hathaway annual shareholders meeting, Buffett said that when analyzing securities at Berkshire, they favor companies where they can have a very good idea of what the business will look like down the road. What's more, he said that when Berkshire looks to buy a business or stock, it wants to purchase those that have earned--and can continue to earn--high returns on capital for owners." Not-to-be-missed tips for value hunters 05/23/07   Tilson "Given that the first step to successful investing is knowing which ponds to fish in, here are the 15 most common types of value opportunities I have been able to capitalise on in my investing career" Buffett reveals stakes in two railroads 05/19/07   Buffett "Warren Buffett's Berkshire Hathaway Inc. on Tuesday revealed stakes in Norfolk Southern Corp. and Union Pacific Corp. - five weeks after the billionaire said he had invested in three railroad companies but wouldn't disclose the names of two. In filings with the U.S. Securities and Exchange Commission, Berkshire also disclosed a 979,700 share stake in WellPoint Inc., the largest U.S. health insurer by membership. The stake was valued at $79.5 million as of March 31, Berkshire said." The poverty business 05/19/07   Debt "In recent years, a range of businesses have made financing more readily available to even the riskiest of borrowers. Greater access to credit has put cars, computers, credit cards, and even homes within reach for many more of the working poor. But this remaking of the marketplace for low-income consumers has a dark side: Innovative and zealous firms have lured unsophisticated shoppers by the hundreds of thousands into a thicket of debt from which many never emerge." The darker side of shareholder democracy 05/19/07   Stocks "In truth, shareholder democracy still isn't remotely like democracy as most people think of it. New research shows how twisted it really is and suggests why it could even be the source of the next big business scandal. The research comes from Yair Listokin, an associate professor at Yale Law School, who studied shareholder voting on proposals put forward by management. Those are critical votes, concerning mostly executive compensation but also merger approvals and other large matters. A majority vote is generally required, and much is riding on the outcome. When Listokin collected data on thousands of such votes, he discovered an amazing thing: On hard-fought issues with significant shareholder opposition, management frequently wins by tiny margins - just a couple of percentage points or even less - but almost never loses by tiny margins. " Where are the shareholders' mansions? 05/15/07   Academia "We study real estate purchases by major company CEOs, compiling a database of the principal residences of nearly every top executive in the Standard & Poor's 500 index. When a CEO buys real estate, future company performance is inversely related to the CEO's liquidation of company shares and options for financing the transaction. We also find that, regardless of the source of finance, future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates. We therefore interpret large home acquisitions as signals of CEO entrenchment. Our research also provides useful insights for calibrating utility based models of executive compensation and for understanding patterns of Veblenian conspicuous consumption." We don't quite know what we are talking about 05/15/07   Academia "Finance professionals, who are regularly exposed to notions of volatility, seem to confuse mean absolute deviation with standard deviation, causing an underestimation of 25% with theoretical Gaussian variables. In some fat tailed markets the underestimation can be up to 90%. The mental substitution of the two measures is consequential for decision making and the perception of market variability." Live from Omaha 05/15/07   Buffett "This year's meeting takes place tomorrow in Omaha's Qwest Center, and investors from all walks of life will gather to pepper Warren Buffett and his business partner Charlie Munger with questions on a whole host of topics. ... If you can't make it to the big event, fear not! The Fool has sent yours truly to the land of steaks and corn to join the other 20,000-plus attendees and keep you abreast of the happenings. On Saturday, keep your eyes on Fool.com to read my live coverage." Patient Capital Q1 2007 05/15/07   Value Investing "Charts 2 and 3 show the Dividend Yields of the TSX and the S & P 500 over long time frames. The dividend yield is our preferred aggregate market valuation method. Cash dividends paid to shareholders are real; there are no debates about methodology and quality of earnings when compared to the Price/Earnings ratio nor relevance when discussing the market's Price/Book ratio. As my accounting professor used to say "if it doesn't jingle it doesn't count!"" Manager frets over the market 05/14/07   Klarman "Earning 22 percent on your investments while holding half of your portfolio in cash is no easy trick, but last year Seth A. Klarman pulled it off, and it was not the first time." Munger speaks on Berkshire's success 05/12/07   Munger ""I didn't set out in life to become the assistant leader of a cult." That is how Charlie Munger welcomed shareholders to the 2007 Wesco (WSC) annual meeting. The cult, of course, is the loyal throng of value investors that invade both Omaha, Neb., and Pasadena, Calif., each spring to learn at the feet at Warren Buffett and Charlie Munger, and as Munger noted "to leave a little wiser than they came."" What Buffett might buy 05/07/07   Buffett "If Buffett is intent on finding a mega-deal, what kind of target is most likely? For starters, the sage favors high-quality businesses with long-term competitive advantages, what he describes as "a moat" that keeps rivals at a safe distance. He shies away from businesses he doesn't understand, such as technology. Perhaps most important, Buffett is looking for a well-run company with a solid management team that he doesn't have to go in and replace. And he's not chasing after a quick buck. Once he buys a company, he wants to hold on for the long haul, unlike most private equity firms." Is the market rational? 05/07/07   Behaviour "That brings us back to Thaler, who was working on a Ph.D. in economics at Rochester in the early 1970s. His dissertation was an attempt to put a value on human life by looking at how much more people were paid to work in risky fields like mining and logging. He was working on the assumption, of course, that people rationally weighed the risk of death in their decision to accept a job. Along the way Thaler decided to ask a few friends how much they'd be willing to pay to eliminate a one-in-1,000 chance of immediate death and how much they would have to be paid to willingly accept an extra one-in-1,000 chance of immediate death. What he found was that they wouldn't pay much for the extra margin of safety but demanded huge sums to accept added risk--which isn't, strictly speaking, rational. "I came to two conclusions about these answers," Thaler wrote years later. "(1) I had better get back to running regressions if I want to graduate, and (2) the disparity between buying and selling prices was very interesting." Thaler did discuss his subversive thoughts with a few trusted colleagues and people from other disciplines. One of those people happened to be a newly minted psychology Ph.D., who sent Thaler a copy of a 1974 article by Israeli psychology professors Amos Tversky and Daniel Kahneman. (Tversky died in 1996; if he were still around, he surely would have shared in this year's Nobel.) The article argued that in making decisions involving probability and risk, people rely on mental shortcuts that "are highly economical and usually effective but ... lead to systematic and predictable errors." It was that last part that was so significant. That people make judgment errors wasn't news, but if those errors were "systematic and predictable," well, that was something an equation-wielding economist could get up and run with." Regaled with Buffettania 05/07/07   Buffett "Will global liquidity keep driving prices higher? The second-richest man in America is "baffled by the liquidity sloshing around in the world. It's hard to find very much fear. That's the trouble with a complacent world." Chimed in Munger: "Eventually we'll have an event that will change people's perception. We always do." What will it be? Privately, Buffett worries about a debacle many times Long Term Capital's demise in 1998. He suggests it will be many hedge funds all with the same highly leveraged positions in derivatives that will be damnably hard--if not impossible--to unwind." Watsa's foray at Torstar 05/07/07   Value Investing "What is he doing? That has been the reaction in some quarters to the recent news that Prem Watsa's Fairfax Financial Holdings Ltd. has bought a good-sized position in the class B nonvoting shares in Torstar Corp., a company controlled by the owners of its class A voting shares. It's not known what value investor Watsa plans to do with what is his first such foray, but there are precedents for such activity." Buffett ready to buy 'big business' 05/06/07   Buffett "Berkshire Hathaway Inc.'s Warren Buffett usually laments that his company has more cash than investment opportunities. Yesterday he envisioned an acquisition so big that he'd have to sell some stocks to free up funds." Buffett, the Wal-Mart shopper 05/06/07   Buffett "Buffett, who rarely reveals much about his investment moves in public, started building a big position in Wal-Mart back in 2005, according to filings with the Securities & Exchange Commission. Two years later, Berkshire owns some 19.9 million shares, roughly $960 million worth, making it one of the insurer's largest holdings. Target first popped up in the portfolio about a year ago, a stake some speculate was bought by Berkshire's other bargain hunter, Lou Simpson, chief investment officer at the GEICO car insurance subsidiary. But in the third quarter of 2006, Berkshire held fewer than 1 million shares, and by the end of the year the investment had disappeared from the company's financial reports." Berkshire Hathaway resembles a mutual fund 05/03/07   Buffett "The mix of companies and investments billionaire Warren Buffett's company holds makes some people think investing in Berkshire Hathaway Inc. is a bit like buying shares of a mutual fund that emphasizes insurance." Canadian stocks that Benjamin Graham might like 05/01/07   Stingy Investing "I like to hunt for U.S. value stocks using Benjamin Graham's criteria for defensive investors. The method focuses on solid companies trading at modest prices. You can read all about it in Graham's book The Intelligent Investor which deserves a spot on every investor's bookshelf. But I'm often asked for Canadian stocks that pass Graham's test. This month I've found five candidates that the master might like." Filing 101: Canada Revenue waits for no one 04/29/07   Taxes "In case you were thinking of allowing the deadline to come and go without so much as lifting a finger, I've got a few things to keep in mind. Avoid penalties for filing your return late. Filing your tax return by the April 30 deadline is important if you owe taxes. Failing to file on time will mean a penalty of 5 per cent of the tax balance owing, plus 1 per cent for each month your return is not filed, to a maximum of 12 per cent. And the penalties could double if it's your second time failing to file on time in the past three years." Your brain on Gucci 04/27/07   Behaviour "Economists used to think consumers made rational purchasing decisions. But a new field of research is revealing neural forces that leave classical theorists scratching their heads" Tip of the hat to Walter Schloss 04/24/07   Schloss Warren Buffett highlights Walter Schloss in his latest letter. Starting on page 21, "Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager. Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts. Walter and Edwin never came within a mile of inside information. Indeed, they used 'outside' information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, 'How would you summarize your approach?' Edwin replied, 'We try to buy stocks cheap.' So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms." I bring this section of Buffett's report to your attention because it is hard to find much written on the publicity shy Walter Schloss. A maestro of investments 04/24/07   Buffett "The bigger mystery is who will become the chief investment officer. Mr. Buffett says he does not know himself. On this point of succession, 'frankly, we are not as well prepared,' he wrote in his 2006 shareholder letter last month. Here is a clue, though. He or she will probably be a lot like Louis Simpson. Louis who? Mr. Simpson, 70, has long overseen the investment portfolio of Geico, the insurance company Berkshire owns, which is now valued at more than $4 billion. He is also the only man other than Mr. Buffett who has managed stock investments in Berkshire's portfolio. " Down payment rule change won't alter much 04/24/07   Debt "Murphy's Law, adapted to the housing market of spring, 2007: What can become more expensive, will become more expensive. House prices and mortgage rates certainly conform these days, but there's one glaring exception. Effective immediately, you can avoid the hefty cost of mortgage-default insurance if you make a down payment of at least 20 per cent, down from the old standard of 25 per cent." ETFs for everyone. Even dermatology investors 04/23/07   Indexing "The ETF business today is a circus. Close to 100 new ones have been listed for trading on North American exchanges so far this year, compared with 170 in all of last year and about 60 in 2005. It's quite a change from the early days of ETFs a decade ago, when there was only an obscure handful of these index funds that trade like a stock. ETFs began by tracking major global stock indexes such as the S&P 500, the Nasdaq 100 and the S&P/TSX composite (and its predecessor, the TSE 300 index). Today, with a choice of funds for virtually all major indexes, ETF providers are turning to more exotic products to build their franchises." Meet the parents-backed mortgage 04/23/07   Debt "The shared equity deals can be a prudent alternative to some of the more creative financing techniques of recent years. Many young homeowners who took on interest-only mortgages, piggyback loans, option adjustable-rate mortgages, and other such gimmicky products are finding themselves financially stretched as the cheaper teaser rates expire and higher market rates kick in. In sharp contrast, equity-sharing deals offer the homeowner a fiscally conservative package. Investors, usually parents, typically put in cash to allow the buyers to amass a down payment of at least 20%. That allows buyers to qualify for a conventional 30-year, fixed-rate mortgage. The equity sharers get back their initial stake plus 10% to 50% of the profits." The high price of free insurance 04/23/07   Brokers "Typically, those who sell policies receive about 20% to 30% of the death benefit. For a $1 million policy belonging to someone with a life expectancy of seven years, a purchaser might pay $250,000, says Adam Balinsky, a partner at Baker & McKenzie in Toronto. But after paying various fees to middlemen that buy policies, the seller would be likely to take home only about $150,000, he calculates. From those proceeds, the seller would have to repay the loan plus various lender fees and interest of 12% to 18%. In the end, the insured might only net about $42,000, Balinsky figures." Last-minute tips that can save big bucks 04/21/07   Taxes "The countdown is on. Just a few days left to file your 2006 tax return. Sure, I know, it's a task that's about as pleasant as cleaning out the refrigerator. When I was a bachelor, I'd put off cleaning the fridge until the science experiment at the back of the bottom shelf would develop legs and walk away. Preparing a tax return may not be quite as exciting -- but it's equally important. And in fact, it can be profitable. To increase the likelihood that preparing your tax return is a profitable experience, let me share with you some last-minute tips that could save you some money." Cundill's quest for hidden value 04/21/07   Funds "Cundill Investment Research, which is owned by fund industry giant Mackenzie Financial Corp., is noted for a strict value approach that means it only buys stocks it believes are trading for less than they're worth. "We buy what everybody else is selling," Mr. Burton said. "That's where we start our search."" Prophet among pinstripes 04/17/07   Montier "The speaker wore his usual uniform of a faded black Timberland sweatshirt and jeans; his London audience was all tailored suits and double-cuffed shirts. But as James Montier finished explaining why money shouldn't be equated with happiness, the equity and bond traders rose to their feet in applause. "I don't think they heard much beyond rule 3," Montier quipped afterward. Rule 3 of his 10 for achieving sustainable happiness is, "Have sex."" Meaty beaty big and bouncy 04/16/07   Montier "The very concept of small cap investing is pretty suspect. From an empirical skeptic's viewpoint, the evidence is not convincing. Since 1981, most of the evidence appears to be that the size effect has vanished. Disentangling the size and value effects suggests that a very large proportion of the size effect is in actual fact a value effect! Even if you still believe in small caps (and it would have to be a matter of blind faith given the evidence) now is certainly not the time to be investing in them. Small caps are trading at a premium to large caps in both the US and Europe. This implies a negative liquidity premium - investors are paying for the pleasure of holding illiquid, inherently cyclically exposed stocks. This doesn't sound like a sound investment proposition to me. In addition, the delivered growth of small caps (whilst in excess of large caps) is usually less than analysts were expecting. Buying an expensive asset with a high likelihood of earnings disappointment (even without the business cycle risk) would seem to expose investors to unnecessary valuation risk." TERs: Another fund cost to consider 04/14/07   Funds "It's called the trading expense ratio, or TER, and it tells you how much your funds are spending to cover the cost of brokerage commissions for buying and selling stocks. People typically determine how much it costs to own a fund by looking at its management expense ratio, or MER. But trading expenses can be a key component of fund costs, and they're not reflected in the MER." Aegis Fund overcomes 'worst stock pick' 04/12/07   Value Investing "Barbee, who has managed Aegis Value since it opened in 1998, buys companies trading at a discount to book value, or assets minus liabilities. The average market capitalization of companies in his fund is $869 million, compared with the $1.3 billion average for those in the Russell 2000 Value Index, which tracks the smallest U.S. companies." Bad times ahead? 04/12/07   Dreman "Given their enormous available capital, Freddie and Fannie could be big beneficiaries of the current panic, as other lenders pull back. The same is true for most of the nation's large commercial banks, where subprime loans are a mere fraction of their loan portfolios." Dividends point the way 04/11/07   Dividends "Dividend investing is often viewed as a conservative -- some might say boring -- strategy where you sacrifice first-rate share price gains for income through quarterly dividends. But it appears that if you buy the shares of companies that steadily crank up their dividends, you can have it all." The executioner of excellence 04/10/07   Behaviour "And speaking of successful money managers, while Warren Buffett has not exactly taken the same vow of "poverty," he does share Swensen's otherworldliness, living in the same modest house for several decades, fitting out his living room at the Omaha Furniture Mart, and subsisting on Coke and cheeseburgers. Is there a connection between Buffet and Swensen.s relative disdain of the material world and their brilliance as money managers and, more generally, of the superior performance of endowments and public pension plans? You bet there is. Cognitive psychologists have long known that we are very poor judges of what makes us happy: the pleasure from money, fame, possessions, and power turns out to be quite transient (and so is the pain from things which we think would permanently sadden us: the depression caused by sudden, permanent blindness or paraplegia, for example, is surprisingly short-lived). Three things provide long-lasting satisfaction, as quantitatively measured by academic psychologists: autonomy, meaningful contact with others, and the development and exercise of competence." [Correction: Illinois Tool Works generally pays 1.1 or less times annual revenue for its acquisitions.] Buffett's Berkshire buys big Burlington stake 04/07/07   Buffett "Warren Buffett's Berkshire Hathaway Inc. has bought a stake of more than 10 percent in railroad operator Burlington Northern Santa Fe Corp. that's worth about $3.2 billion, according to a filing with regulators." Big profits = danger ahead 04/05/07   Markets "To gauge how much you're really paying for a dollar of profits, it's more revealing to compare today's prices with average earnings over the past ten years. That formula takes out the big swings in earnings that can make stocks look artificially undervalued or overvalued. By smoothing earnings, Asness gets an adjusted P/E of around 25 for the S&P 500. That's well above the historical average of 14 or 15. That's expensive, and buying in at high prices has always been the ticket to low future returns." Imperfect union 04/05/07   Crime "Lies, kickbacks, union corruption and tens of millions of dollars in ill-gotten gains are among the accusations laid out in a lawsuit that's likely to strike fear in the hearts of labor leaders and financial executives across the country." Lessons from living down and out 04/05/07   Thrift "We were poor and unhappy, so I thought having money meant being happy . . . (but) my husband also grew up very poor, and his family was close and he had a loving childhood. (Meanwhile,) many rich people are miserable. Don't confuse money and happiness. They're separate issues and you need to work on your family and relationships just as hard as you work on finances. Don't give up family and relationships in pursuit of money and don't assume money will fix your personal life." Buffett wisdom 04/04/07   Buffett "LTCM had taken a huge leveraged position in these bonds when the spreads were much smaller, but didn't have the collateral to hold on to it when the spread widened. Buffett quoted John Maynard Keynes, who wrote in 1931 that 'The market can stay irrational longer than you can stay solvent'. As the spread widened, Keynes' dictum became devastatingly relevant for LTCM. But Berkshire, with its huge cash hoard, could withstand the pressure of even more market irrationality before the spread eventually returned to normal. Unfortunately, Warren was never able to consummate the deal. He had been invited by Bill Gates to vacation in Alaska when the crisis broke and it was hard to negotiate such a deal on a cell phone. Eventually the banks holding the collateral made a deal with LTCM and Berkshire didn.t have a chance to top their offer. Warren is philosophical about the loss of this opportunity, noting it was the most expensive vacation he ever took. 'Bill Gates cost me about $3 billion,' he shrugged." Bill Miller, mired in worst slump of career 03/30/07   Miller "Miller has stumbled at a critical time for his firm. Legg Mason, which manages about $945 billion, has been trying to meld itself with the fund management arm of Citigroup Inc. Legg Mason swapped its brokerage arm for Citigroup's money management division in 2005, doubling its assets. Miller's Value Trust has fallen further behind the S&P 500 in 2007, with a 1.7 percent loss through March 29, compared with a 0.23 percent decline for the index." Bad news, good news 03/27/07   Whitman "You want the lowest-cost, with best profitability, and a better balance sheet, so you'll be the last man standing, even when business is drying up." Feds investigating homebuilder Beazer 03/27/07   Stocks "Amid the meltdown of the subprime housing sector, mortgage lenders and brokers have come under fire from state and federal officials for predatory lending practices with those risky borrowers. Now one national homebuilder is feeling the heat. BusinessWeek has learned that federal investigators have opened a broad criminal probe into lending practices, some financial transactions, and other dealings at Beazer Homes USA (BZH)." Ponzi nation 03/27/07   Markets "Two contrasting hypotheses can explain recent developments in the financial world. The Great Moderation holds that owing to better policymaking and structural improvements to the financial system, both the economy and markets are more stable than in the past. The newfound stability is viewed as a secular development. In other words, it's here to stay. Therefore lower credit spreads and higher levels of leverage are justified. Investors persuaded by this view will have few qualms about buying risky assets despite their historically low yields. Hyman Minsky, on the other hand, suggests that people's response to stability engenders instability. Such behavior is not necessarily irrational, as there are profits to be earned and bonuses to collect as long as the good times last. In fact, the cycle may extend as long as credit flows and people are hungry for risk. Yet Minsky's credit cycle heads inexorably toward a bust. Investors who accept this analysis will probably conclude that risk and reward are currently out of whack. They will position their portfolios defensively, keeping cash on hand to spend when the rewards for taking risk appear more compelling." User's guide to Buffett's portfolio 03/26/07   Buffett "Buffett, the smartest investor ever, has done a lot of work for us when he buys a position and then discloses his holdings. Studying in the footsteps of the master and his disciples, but using that as a starting point for your own research, will end up being a very lucrative practice." Five breakup possibilities 03/26/07   Stocks "A company's various businesses can be worth much more than Wall Street's appraisal of the entire enterprise. In this installment of our Beyond the Balance Sheet series we examine five breakup possibilities." Houses cheaper than cars in Detroit 03/24/07   Real Estate "With bidding stalled on some of the least desirable residences in Detroit's collapsing housing market, even the fast-talking auctioneer was feeling the stress. "Folks, the ground underneath the house goes with it. You do know that, right?" he offered. After selling house after house in the Motor City for less than the $29,000 it costs to buy the average new car, the auctioneer tried a new line: "The lumber in the house is worth more than that!" As Detroit reels from job losses in the U.S. auto industry, the depressed city has emerged as a boomtown in one area: foreclosed property." Foreclosures force suburbs to fight blight 03/24/07   Real Estate "In a sign of the spreading economic fallout of mortgage foreclosures, several suburbs of Cleveland, one of the nation.s hardest-hit cities, are spending millions of dollars to maintain vacant houses as they try to contain blight and real-estate panic." Mortgage liquidity du jour 03/24/07   Real Estate "We believe that 40% of the market (share of subprime and Alt-A) is at risk of significant fallout from tightening credit and increased regulatory scrutiny. In particular, we believe the most pressing areas of concern should be stated income (49% of originations), high CLTV/piggyback (39%), and interest only/negative amortizing loans (23%). The proliferation of these exotic mortgage products has been disproportionately weighted to former hotbeds such as California, Nevada, Arizona and Florida, which have accounted for the lion share of builder profits." 'Suspicious' trades precede mergers 03/22/07   Markets "Lingerie suddenly became very popular on the Toronto Stock Exchange in October. Daily trading for La Senza Corp., Canada's biggest retailer of women's undergarments, more than doubled compared with its 12- month average, and the stock price arced toward a record high. On Nov. 15, Limited Brands Inc. announced it would buy Toronto-based La Senza and pay shareholders a 48 percent premium. That unusual trading wasn't so unusual for the Canadian market. Aberrant trading patterns preceded 33 of the 52 Canadian mergers valued at more than C$200 million ($172.6 million) last year, says a study by Measuredmarkets Inc. for Bloomberg News. Those patterns could indicate insider trading." Explaining the Wisdom of Crowds 03/22/07   Markets "Debate about the wisdom of crowds - the idea a collective can solve problems better than most individuals within the group, including experts - has percolated in recent years. While enthusiasts and detractors have made their case, much of the marshaled evidence is anecdotal. Even when the idea's supporters specify the necessary conditions for the wisdom of crowds to succeed, there is rarely discussion of how it works. In an approving 2006 New York Times article, columnist Joe Nocera explained collective accuracy by plucking a Hollywood movie line: 'It's a mystery'. Fortunately, Scott Page.s important new book, The Difference, introduces some much-needed rigor into why collectives do well and why they fail, why experts are often inferior to the crowd, and why diversity is important. Page not only carefully defines his terms, he also uses mathematical models to develop and apply theorems. These theorems illustrate the logic of diversity, removing a good deal of mystery from the wisdom of crowds. In this discussion, we apply Page's models to three types of problems and provide real-world examples and data for a pair of them." Chou annual 2006 03/18/07   Chou "it appears obvious that investors are throwing caution to the wind. Risk is not priced into riskier securities at all. Whenever the majority of investors are purchasing securities at prices that implicitly assume that everything is perfect with the world, an economic dislocation or other shock always seems to appear out of the blue. And when that happens, investors learn, once again, that they ignore risk at their peril." Is your apartment like a dot-com stock? 03/16/07   Real Estate "The scariest aspect of today's real-estate market is the conviction that houses are always a good investment. In the nineties, the mantra was "stocks are the best investment for the long haul." This had the benefit of being true, then and now; for 200 years, stocks have outperformed every other asset class, including real estate. But the "long haul" is long. For vast stretches of time.1901 to 1920, for example, or 1966 to 1982 - stocks have performed terribly. And, in New York, the same goes for real estate." Warren Buffet talks competitiveness 03/16/07   Buffett "CNBC's Liz Claman and Berkshire Hathaway Chairman Warren Buffett sat down for an exclusive interview March 13 at a high-profile conference in Washington D.C. on the competitiveness of U.S. capital markets hosted by Treasury Secretary Henry Paulson. Buffett, known as the Oracle of Omaha for his investing acumen, was one of the many big-name business leaders who took part in two panels on the subject." Investing by the book 03/16/07   Stingy Investing "Investors love profits - the bigger the better. But when evaluating potential stock buys, it's important to consider more than just how much a company earns. You should also take a gander at what it owns. You can often spot valuable opportunities when you find solid assets selling for low prices. One way I like to look for bargains is by examining a company's book value. This is the historical value of all its assets minus its liabilities. The price-to-book-value ratio (P/B) that you see quoted on many financial websites compares this book value to the current price of the company's shares. If you buy stocks with low P/Bs, you're buying assets at a bargain price." Not in your backyard? 03/15/07   Real Estate "But Westie's peaceful life was shattered last January when he and his neighbours found beer cans and crudely spray-painted signs on old-growth trees that read "Active Mining Claim" strewn across their properties. It soon became clear that Bruce Essington - a reclusive nearby resident whose only discernible connection to mining is an old leather miner's helmet that locals have seen him wearing as he tromps through the bush - had painted the signs. When Westie began noticing the man walking on his property - even allegedly lurking around his home - he became so concerned for the safety of his family that he briefly moved his wife and 10-year-old daughter into town and bought a second guard dog. When Westie first called police to complain, he was told there was nothing they could do. Essington had secured the mineral rights to Westie's land and much of the surrounding area. Under Canada's "free entry" mining system, prospectors and mining companies have the right to enter both public and private property to explore and develop their mineral claims. That means they can legally cut down trees,dig trenches, drill holes and even use heavy machinery to take away thousands of tonnes of rock samples . all without the permission of a landowner. "A free miner is the last free man in Canada," says Westie- "They have more power than the RCMP to go on your property and do whatever they wish."" Real estate can only fall 10% to 20%, right? Right? 03/15/07   Real Estate "You've probably read this before: Even when housing prices slump, they don't fall all that much, at least compared to stocks and other risky investments. I've passed on this bit of "wisdom" myself. And it it's not a totally ridiculous thing to say: Even in the big California bust of the mid-1990s, prices in the L.A.-Orange County metro area fell only 20% peak to trough in the region's worst five years. That's no Nasdaq. But, well, there's a bit more to it than that...." The emergency fund you can eat 03/15/07   Thrift "Having a substantial cash emergency fund is an important financial goal, but it's not an easy one. Building up enough savings to cover three months' worth of expenses can take some families years to accomplish, as they struggle with more pressing goals, such as paying off credit card debt and saving for retirement. Fortunately, there's another kind of emergency fund that's a lot easier to put together: a well-stocked pantry." No free rides on Berkshire's dollar 03/15/07   Buffett "Sure, there are CEOs who have no qualms about having shareholders foot the bill for frequent use of company planes and other lavish expenses, but Buffett won't be counted among their ranks. Last year he reimbursed Berkshire $50,000 for personal expenses, so that shareholders wouldn't be stuck with the bill for his postage stamps and phone calls home, according to the statement. In fact, Buffett describes his payment as "equal to or greater than the costs" of his expenses." The riches of irrationality 03/14/07   Behaviour "Buy low and sell high. In other words, buy when it's cloudy outside but sell when the sun is shining. Yes, aspects of the weather do affect stock markets after all. In a 2001 paper, Ross School of Business Prof. Tyler Shumway and a colleague showed the existence of the sunshine effect, which says the amount of cloud cover in the vicinity of major international stock markets has a significant correlation with trading patterns for the day. Moreover, this significance rises into relevance as researchers show that the sunshine effect will deliver higher returns - even taking into account the transaction costs incurred with trading to the vicissitudes of meteorology." Dreman scoops up bank shares 03/12/07   Dreman "Just when it looked like the four- year boom in financial companies' shares was over, some of the world's biggest investors are betting the best is yet to come. Dreman Value Management LLC, Pioneer Investments and Societe Generale SA say they're unconvinced surging defaults on so-called subprime home loans, or those made to the riskiest borrowers, will unravel the banking industry. They expect profits at the largest firms to keep growing, bolstered by fees from corporate and private-equity takeovers. The prospect of lower U.S. interest rates may also help support lending." Crouching fraud, hidden losses 03/12/07   World "China's accounting has historically been used to support state economic policies, explains Stephen Chipman, an expert in China's financial and accounting systems at accounting firm Grant Thornton. With the founding of the Communist People's Republic of China in 1949, the state became the sole owner of industries. The only economic entity was the state-owned enterprise. That meant businesses reported information according to a centrally planned economy, and China's accounting standards tended to give out paltry information, focusing mostly on an inventory of assets, with very little Western-like level of detail on things like debt, depreciation or returns on investment, Chipman says. On top of that, an accounting profession where accountants truly act as watchdogs also has yet to develop. "China is dealing with not only almost 50 years of atrophy in its financial reporting, but also 50 years without the development of an accounting profession," Chipman says." Could you stop spending for a month? 03/12/07   Thrift "For the 28 days of February -- I picked the shortest month to make it easier on volunteers -- those who wanted to participate would buy only necessities. Each person would get to define what was a necessity for himself or herself. At the end of the month, everybody would report back on how their shopping fast went. The point wasn't just to save money. It was also a way of examining our relationship with money." Take a big bite out of grocery bills 03/09/07   Thrift "But as I learned from the food mavens on the Grocery Challenge thread, living in the land of cheap grub is not a reason to become complacent. No, no! As these savvy shoppers will tell you: If you think you got a certain item for a great price, rest assured there's a way to get it even cheaper -- or maybe even for free." Top funds stand by subprime bet 03/09/07   Value Investing "In recent weeks, as mortgage defaults have risen, shares of subprime lenders have plunged. Countrywide Financial, one of the nation's largest subprime lenders, sank 16.1 percent in the past month. Similarly, homebuilder stocks continue to slump - Pulte Homes, for one, is down 19 percent over the past year. This debacle has damaged the returns of many of the best fund managers around, including Bill Miller of Legg Mason Value (with a loss of 1.6 percent year to date), Ron Muhlenkamp of the Muhlenkamp fund (- 3.7 percent), and Wally Weitz of Weitz Hickory (- 0.7 percent). All three have held on to these stocks in the belief that real estate will rebound. How did these smart stock-pickers make such a big mistake? Well, actually, they don't see it that way. For these managers being out of step with the market is a sign that they are doing their jobs. After all, the best way to earn returns is by spotting opportunities long before everyone else." Master of the turnaround 03/07/07   Value Investing "It turns out that what Williams meant by invoking baboons is that he has a method of investing that has become as natural and comfortable as his own skin. So, sure, to him it seems easy. To learn about those methods, we chatted with Williams at his firm's Manhattan headquarters. We found Williams, who had come in for the day from his office in suburban Essex, Conn., east of New Haven, to be disarmingly unassuming and an investor who likes to keep things simple." Everybody's an expert 03/07/07   Books "People who are not experts in the psychology of expertise are likely (I predict) to find Tetlock's results a surprise and a matter for concern. For psychologists, though, nothing could be less surprising. 'Expert Political Judgment' is just one of more than a hundred studies that have pitted experts against statistical or actuarial formulas, and in almost all of those studies the people either do no better than the formulas or do worse. In one study, college counsellors were given information about a group of high-school students and asked to predict their freshman grades in college. The counsellors had access to test scores, grades, the results of personality and vocational tests, and personal statements from the students, whom they were also permitted to interview. Predictions that were produced by a formula using just test scores and grades were more accurate. There are also many studies showing that expertise and experience do not make someone a better reader of the evidence. In one, data from a test used to diagnose brain damage were given to a group of clinical psychologists and their secretaries. The psychologists' diagnoses were no better than the secretaries'." Why subprime lenders are in trouble 03/02/07   Bonds "As the subprime mortgage market goes into steep decline, threatening to drag the whole economy along with it, many people are wondering what could have gone so wrong so quickly. Until recently, after all, delinquency and foreclosure rates on subprime loans were reassuringly low. The answer may lie in how the quality of these mortgages has changed over the years. While subprime is the term used for loans issued to people with poor credit, not all subprime loans are created equal. And the subprime loans that were originated in 2006 that are turning out to be shockingly weak." Big insider-trading bust 03/02/07   Crime "The case involves allegations that hedge funds bought information about impending rating changes on stocks from an executive at UBS, got tips about upcoming corporate mergers from a former Morgan Stanley compliance officer, and paid a Bank of America broker for the right to get shares in hot initial public offerings. There's even a charge that some day traders, who had gotten wind of the alleged activities, were shaking down other traders for money to keep secret their role in the purported insider-trading scheme." Berkshire Hathaway's 5-star stocks 03/02/07   Buffett "In its recent filing, Berkshire disclosed three new positions: Ingersoll-Rand Company (IR), United Healthcare (UNH), and US Bancorp (USB). It should be noted that Berkshire had been accumulating its stake in US Bancorp since early 2006 but had been granted permission to delay the filing of this position over the last couple of quarters. Berkshire also modestly boosted its stake in Wells Fargo (WFC) and USG (USG)." Berkshire Hathaway annual for 2006 03/01/07   Buffett "Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager." A devilish delusion 03/01/07   Books "In 1982, the Academy Award for Best Costume Design went to a film called Chariots of Fire, the story of a couple of upper-class Brits as they trained for and competed in the 1924 Paris Olympics. (You had to be there.) The movie was the year's big hit; it won a slew of awards, including Best Picture. Have you seen Chariots of Fire? It's about track and field; the actors basically spend the bulk of the movie running around in their underwear. Bam - give'em the costumes Oscar!" The sure thing almost nobody plays 03/01/07   Dreman "Imagine you are entering a deluxe, well-appointed casino. Off the lavish entry foyer, there are two ample gambling wings, one hued in reds, the other in muted greens. The red wing looks enticing, but if I may insist, let's first enter the less crowded green rooms to watch the action. The atmosphere is unhurried, the blackjack tables are sparsely attended, and every player sits behind a mound of green and black chips. You think at first you've come to the wrong place. You see the ordinary table limits, the ordinary clothes, the ordinary games. But then how did these ordinary people get such piles of money? Then it comes to you. They're all winning. In fact, as you walk around the green wing, you hardly can find a losing player. You know, of course, that the average house take on table games is 5%, but as you count winning and losing hands, you realize these players are getting a better break. They seem to be gaining at a rate of 60% to 40%. You start fresh and take another count. The results are the same. A pit boss appears at your shoulder. "Excuse me," you say, "but can this be right? The odds favor the players?" "Yes, indeed. The odds in the green room usually run 60 to 40. It's been that way since we opened." "But...most of the players must go away winners." "They sure do. At those odds, we calculate that 9,999 out of 10,000 make money. At our high-stakes tables in the back, they do even better, with winners running about 20,000 to 1. It's a good thing we get so few players, or they'd break the house." Somewhat amazed, you thank him and shake your head. There's no time to lose, you decide, but you'll need more than the few dollars you have in your pocket. You hatch a plan to gather your life savings, come back to the casino, and win the bundle you've been dreaming of. On your way out, you glance into the red wing. The action level is much, much higher. The room is crowded and fairly roars with excitement. Can it be even better here, you wonder? Curious, you go in. Players bet multiple table positions, wave frantically for change, entreat the gods for luck. You see few green and black chips, fewer winning players. The piles of chips in front of them are dwindling with each hand. In fact, the odds are worse than normal. Again, you start to count. Although the players continue to excitedly toss in their chips, the odds appear to be maybe 60 to 40 in favor of the house. Once more, your curiosity whetted, you walk over to a pit boss and ask her the odds at these tables. She tells you what you suspected. They are 60 to 40 in favor of the casino. Warming up to the subject, she chuckles and says, "This room coins gold for the casino, the chances are 9,999 in 10,000 rounds that we wind up winners." You don't have to be a genius to see that this is obviously not the place you want to be. You go home and get your stash. You return to the casino with your fistful of money, excited, eager for action, all the time figuring how you'll do even better at the game. But then a strange thing happens. You walk into the red wing and start to play." Are good companies bad investments? 02/26/07   Value Investing "From 1983 to 2006, the mean annualized return of the less admired companies was 17.8 percent, beating the more admired group's 15.4 percent return. Interestingly, both groups beat the S&P 500's 11.2 percent return over the same period." Stocks of admired companies and despised ones 02/26/07   Academia "Do stocks of admired companies yield admirable returns? We study Fortune magazine's annual list of "America's Most Admired Companies" and find that stocks of admired companies had lower returns, on average, than stocks of despised companies during the 23 years from April 1983 through March 2006. We link differences between the returns of stocks of admired and despised companies to differences in affect, the quick feeling that distinguishes good from bad, admired from despised. The affect of admired companies is positive, and investors who were attracted by affect to stocks of admired companies paid for it with lower returns. However, the relative returns of stocks of admired and despised companies varied considerably from year to year and from decade to decade and the relationship between admiration and returns is not always monotonic." The importance of measuring payout yield 02/23/07   Dividends "Previous research showed that the dividend yield process changed remarkably during the 1980's and 1990's, but that the payout yield (dividends plus repurchases over price) changed very little. As such, we investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find that the widely documented decline in the predictive power of dividends for excess stock returns is due largely to the omission of alternative channels by which firms distribute and receive cash from shareholders. Statistically and economically significant predictability is found in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus equity issuances) yields are used instead of dividend yield. In the cross-section, we find that payout yield contains information about expected stock returns exceeding that of dividend yield and that the high minus low payout yield portfolio is a priced factor. Finally, we show that trading on this characteristic leads to excess profits that can not be explained by the traditional risk factors." Debt-market bomb could hurt us all 02/23/07   Bonds "The greatest economic threat today isn't deflation in the housing market. A bigger worry is that a meltdown in the debt markets could force the global economy into a credit squeeze and recession." Every bite you take 02/22/07   Stocks "It comes as little surprise that institutions like hospitals, universities, and military bases flock to Sysco's pre-cooked foods. But well-regarded bistros and pubs have also begun to offer such items to save time and money. Recently, New York magazine reported that Thomas Keller uses frozen Sysco fries at his Bouchon bistros. (While a company spokeswoman wouldn't confirm the brand, she confirmed the use of frozen fries.) Mickey Mantle's Restaurant, an upscale sports bar, serves Sysco's pre-made soups, like Manhattan clam chowder and vegetarian black bean. And then there's Edgar's restaurant at Belhurst Castle, which has won numerous awards of excellence from Wine Spectator magazine. There, the kitchen takes Sysco's Imperial Towering Chocolate Cake out of the box, lets it defrost, and then sprinkles it with fresh raspberries before serving it to diners. "We've had a lot of success with that cake," executive chef Casey Belile says. The Edgar's menu, of course, does not list the dessert as a Sysco pre-made cake, but it does charge $8.95 for the experience." Buffett bets on housing 02/22/07   Buffett "So what is he buying now, and what can we learn from it? First, he's once again making the bet that housing and construction might be in a medium correction but not a long-term slump." Now that's rich 02/21/07   Stocks "On April 3, 2006, the first day of post-CCAA trading, Stelco's stock closed at $19.49. The next day, the price was $24. Today, after posting its latest string of losses, the shares are pretty much worth what they were trading at during Mott's first week on the job. But his million-plus options are worth about 15 million bucks. Mott.who was also allowed to buy a million shares at $5.50, netting him more instant millions - insists it's common to offer strike prices equal to the value of shares on the day options are granted. He's right. But Stelco has a reputation for handing out unjust executive rewards, so my question is: why didn't it wait a few days and let the market set a fair price?" Looking for love, and money 02/21/07   Thrift "Oh, to be dating in the time of Jane Austen. No sooner does a young man move into the neighborhood than everyone knows he's single -- and exactly what his income is and how much property he owns. Not only that, but as this sly opening sentence of Austen's "Pride and Prejudice" suggests, finance and romance were presumed to go hand in hand. It was perfectly acceptable for a gentleman to look for a wife with financial assets or for a woman to seek a beau with the best prospects. Unfortunately, courtship has lost some of its financial candor in the past 200 years. Even with the rise of online dating -- where people answer numerous questions and create elaborate, supposedly revealing profiles of themselves -- it's hard to find your financial match." He chooses the best of the bargain bin 02/21/07   Chou "Success and a tidy personal fortune have come to Mr. Chou through a remarkable odyssey. Born in India, he immigrated to Canada in 1976, got a job as a telephone repair man for Bell Canada and worked for seven years, during which time he discovered the legendary Ben Graham, co-author, with David Dodd, of Security Analysis, the book that established value investing as a discipline. Mr. Chou, who had only his Grade 12 under his belt, and half a dozen co-workers chipped into a pool that totalled $51,000 and created the fund that became Chou Associates. Each dollar invested at the start in July, 1981, has become $38, Mr. Chou said. The original investment club was converted to a mutual fund in 1986 and, over the next 20 years, the fund has produced an average annual compound gain of 14.09 per cent, making it one of the top four mutual funds among the 216 with 20-year records." Get healthy - or else 02/19/07   Health "Two stories - one man saved by the 11th-hour intervention of his employer; another fired on his 30th birthday for smoking - capture the dilemma facing companies around the country. How do executives looking to cut medical costs persuade employees to take better care of themselves without killing morale and spawning lawsuits?" Bargain hunter 02/17/07   Montier "Several findings are apparent from examining the table. First (and of foremost importance to me) is that buying cheap stocks did indeed outperform. Simply buying an equal weighted basket (assuming equal distribution of stocks across portfolios) of the lowest 20% of PEs within the MSCI World index generated significant outperformance (9.7% p.a. on average). Such a strategy would have only resulted in absolute losses in only five out of the thirty years in our sample." Are you saying no to free money from your employer? 02/17/07   Retirement "About that money your employer has ready to add to your retirement savings. You're not wasting it, are you? Lots of Canadians are. Some aren't participating in group registered retirement savings plans and thus missing out on matching employer contributions. Others are neglecting the money they and their bosses are putting into defined-benefit pension plans and thus hurting their returns. Pensions are complex, so we tend to ignore them and hope for the best. But for many people, pensions and group RRSPs will be as important to them after they leave the work force as the individual RRSPs everyone focuses on at this time of year. The cost of ignorance: Tens of thousands of dollars you might otherwise have had available when you retire." Patient Capital Management Q4 02/16/07   Value Investing "As we enter 2007 we are again witnessing a period when investors are greedily buying. The absence of fear and complacency towards risk truly astounds us. As is usually the case, the cause for optimism and complacency is rooted in sharply rising short term security prices." A wing and a prayer 02/16/07   Value Investing "Value investing has never been sexy. It involves poring over a lot of financial statements to find companies with shares that are priced below their historic norm or below the inherent value of the business. That slow and steady approach tends to generate solid gains over the long haul (just ask Warren Buffett). But over the short term it can look awfully stodgy compared to growth investing, which tries to identify companies that are poised for rapid expansion - think of Apple Computer since the introduction of the iPod in 2001 and its iTunes online music store in 2003." [Note: Apple was a good value in the summer of 2002 when it traded at a market cap just above the amount of cash it had in the bank. At least that was my view when I bought a few shares.] Costco: The 'anti-Wal-Mart' 02/16/07   Stocks ""Retailing isn't rocket science. Costco has figured out the big, simple things and executed with total fanaticism," says Charles Munger, a Costco director for the past 10 years. The outspoken Munger, 82, is better known as Warren Buffett's longtime partner at Berkshire Hathaway, where he serves as vice chairman." Mississippi fails to learn from history 02/16/07   Government "In the 1840s, the state of Mississippi faced economic problems. Governor Alexander McNutt resorted to an easy out: he blamed the state's troubles on foreign investors, and, invoking Judas and Shylock, closed a budget gap by repudiating Mississippi's bonds and debts. Mississippi courts at first refused to recognize the repudiation, but investors who trusted the rule of law were ultimately out of luck: an 1853 referendum refused to raise taxes to pay the obligations, and an 1875 amendment to the state constitution prohibited the state from paying back the bonds. Mississippi had successfully bilked its creditors (including the family of William Wordsworth, who wrote a sonnet about the injustice) for short-term gain, but the victory was Pyrrhic: cut off from the credit markets, the state economy has languished behind the rest of the nation ever since." Why these good times feel so bad 02/16/07   Economy "In essence, the idea boils down to this: Whether it's the job or stock markets, the official numbers report a "net" figure -- the final plus or minus after all the messy adding and subtracting is done. But we live our lives in that messy world of the gross numbers before the final calculations. The reality that we experience is in the gross and not in the net numbers." How active is your fund manager? 02/14/07   Academia "To quantify active portfolio management, we introduce a new measure we label Active Share. It describes the share of portfolio holdings that differ from the portfolio's benchmark index. We argue that to determine the type of active management for a portfolio, we need to measure it in two dimensions using both Active Share and tracking error. We apply this approach to the universe of all-equity mutual funds to characterize how much and what type of active management they practice. We test how active management is related to characteristics such as fund size, expenses, and turnover in the cross-section, and we look at the evolution of active management over time. We also find that active management predicts fund performance: the funds with the highest Active Share significantly outperform their benchmark indexes both before and after expenses, while the non-index funds with the lowest Active Share underperform. The most active stock pickers tend to create value for investors while factor bets and closet indexing tend to destroy value." Come out of the closet 02/14/07   Montier "Occasionally, the underperformance of fund managers vs. the index is trotted out as evidence of the efficiency of the market. However, this confuses the absence of evidence with evidence of the absence. A new study suggests that closet indexing accounts for nearly one third of the US mutual fund industry. Stock pickers account for less than 30% of the market, yet they have real investment skill." What should it cost to say 'I love you'? 02/13/07   Thrift "Is Valentine's Day about love or money? My heart tells me it should be about love and appreciation for those who matter most to us, but the facts show that Valentine's Day is truly big business." 9 lessons I learned in the past 9 years 02/13/07   Dorfman "Today I'm putting away my quill to devote fuller attention to Thunderstorm Capital, an investment firm I founded in 1999. For my last column, I'd like to highlight nine lessons that emerged from writing the column in the past nine years." [Doh!] Destitute at 80 02/12/07   Retirement "A number of advocates and studies provide for 5% withdrawal rates: "I only want $50,000 from my million dollars" and have it last for 30 years. The calculated success rate for that rate of withdrawal is 73%. Pretty good odds...except when we consider the impact of valuation." Nine stocks for private equity 02/12/07   Graham "This is the peril of market timing, something the buy-and-hold brigade will smugly smirk about as they attempt to get rich slow. The lesson might be, however, to buy cheap rather than buy expensive. This is of course obvious and often considered little short of facetious advice. However, it doesn't need to be. Benjamin Graham, the granddaddy of investment gurus, had a plan to do just that. It boiled down to buying low price-earnings stocks with dividends and a solid business core. This proved to be the foundation for value investment, which is as strong an investment methodology today as it was in the 1950s." A buyer's guide to online brokers 02/10/07   Brokers "This year's Globe and Mail survey of online brokers for RRSP investing includes 15 firms and it focuses strictly on services delivered over the Internet. All the usual players are here, from BMO InvestorLine to TD Waterhouse, but there are three newcomers as well. DisnatDirect, Questrade and TradeFreedom mainly target aggressive stock traders, but they're increasingly reaching out to more mainstream investors who focus on stocks." One of our favorite 5-star stocks 02/10/07   Buffett "Any final words of wisdom for those who own or are considering owning the shares? In my opinion, Berkshire remains a premier franchise whose stock is currently offering investors a very attractive risk/reward scenario. If you bought some Berkshire stock today and put it under your mattress, I strongly believe that 10 years from now it will be worth significantly more than what you paid for it." If hedge funds kept cows 02/10/07   Fun "A famous series of jokes attempts to define political systems. In communism, for example, you have two cows, your commune seizes them and charges you for milk. In a democracy, you have two cows, the cows outvote you 2-1 to ban all meat and dairy products, and you go bankrupt and starve to death. Similar thinking can be applied to financial markets. Here, then, is the world of money recast in bovine terms." Gifts in the age of $2,000-a-pound chocolate 02/10/07   Economics "If you are still seeking the perfect gift for Valentine.s Day, have you considered a box of Noka chocolates? Both you and the recipient may be in for a surprise. A 12-piece box costs $39 before tax and shipping. And for that you will get 0.9 ounce of chocolate. Not 0.9 ounce a piece, but 0.9 ounce in the entire black and silver box. Do the math and that comes to $693 a pound. Buy just four pieces in the Signature stainless steel box and you are paying more than $2,000 a pound, making the Noka chocolate more expensive than delicacies like caviar, saffron or black truffles." Buy 'em like Buffett 02/09/07   Buffett "Warren Buffett has established his reputation as the "World's Greatest Investor" by taking the longer view - buying quality stocks with good earnings power and hanging on through both bull and bear markets. During the last few decades, he has parlayed some well-chosen core holdings into an unparalleled performance record - not to mention an enormous personal fortune." Living 'poor' and loving it 02/09/07   Thrift "Here, then, are the rules for How to Be Poor: Rule 1: Have very little money. Rule 2: Live on it. Rule 3: Rule 2 will change your life, if you let it. Being poor means taking a hard look at your needs and getting ruthless about separating them from the wants." ETFs: A user's guide 02/08/07   Indexing "There's nothing Wall Street loves more than having a new product to peddle, and exchange-traded funds (ETFs) have been one of the most popular offerings of the new century. Last year no fewer than 156 new ETFs hit the market; today, the total is about 400. The pace is set to pick up this year when the Securities and Exchange Commission streamlines the approval process. And ETF sponsors are hoping to make them available in 401(k)s, which would give them a much broader audience. So with all the hoopla surrounding ETFs, you may feel you have to have one - or collect the whole set! But as you would with any novelty from Wall Street, give ETFs a careful look before plunging in." The weird world of ETFs 02/08/07   Indexing "Exchange-traded fund launches are quickly becoming as routine as the launches at Cape Canaveral. Fund companies rolled out 155 new ETFs in 2006, according to Boston consultancy Financial Research Corp. As new products hit the market, the nature of the products is changing. Best known as cheap, tax-efficient portfolio diversifiers, ETFs now provide exposure to even the narrowest - and sometimes most outlandish - investment niches." Martin Whitman's distress success secrets 02/08/07   Whitman "Distress investing begins with companies that have flopped because of bad managers, bad balance sheets, or a combination of both. It uses bankruptcies and sweeping corporate reorganizations to make handsome profits off the misfortunes of poorly run entities. "This is a high .beta' business," Mr. Whitman said with just a hint of sarcasm." 5 Stingy Stocks for 2007 02/07/07   Stingy Investing "Since a rocky start in 2001, the stingy stocks have provided a total gain of 183.6% assuming that the old stocks were sold and the new stocks purchased each year. In comparison, the S&P500 (as represented by the SPY exchange-traded fund) lagged by 151.3 percentage points over the same period." Financial sanity down a country road 02/07/07   Thrift "Who knew a beer out here was only $1.50? That's just one of many discoveries I've made since trading the big city for a life in rural New York. The bright spots outweigh the drawbacks so far." Value and momentum 02/06/07   Dorfman "People who scour the stock market for bargains tend to buy too early, and I am no exception. To counteract this problem, some value investors look for stocks that show some upward price momentum. Twice a year for the past few years, I have been put together a list of stocks that I think have both value and momentum." Hot air in Essex County wind power 02/06/07   Government "In fact, countries in Europe that have installed wind power as base load find they end up buying power on the spot market when the wind isn't blowing and then selling their wind power at a loss when the wind is blowing (but air conditioners aren't being used as intensely). Denmark is often considered a leader in wind energy but according to Lee it ends up selling 84% of its power at a loss. "European countries that have put in a lot of wind power end up subsidizing their neighbors," says Lee. "Wind power has not yet enabled the closure of a single fossil-fueled generating station anywhere in the world." The German energy agency recently suggested that increasing the amount of wind energy in that country would increase the cost of electricity to consumers almost fourfold and that a reduction in greenhouse gases could be achieved more cheaply by installing filters and condensers on existing fossil-fuel plants. According to Lee, it's often been suggested that the theoretical maximum for the amount of base load that can be derived from wind power is 15%, but even that seems to be a stretch. A more likely percentage seems to be 3% or 5%, says Lee." Insurance legend still packs a punch 02/04/07   Management "Byrne, who returned in May as chairman of the board of the $19 billion White Mountains Insurance Group, doesn't get very upset when talking about a mere $100 million. His company just took an unanticipated loss of twice that amount, and he shrugged that off as well. "Two hundred million is not a killer. We are a company built to withstand stuff like that." Indeed, it's only after he reaches the $200 million mark that he even looks to outside investors, often his good friend, the multibillionaire investor and financial guru Warren Buffett, who once put together a $600 million dollar deal in a 40-second phone call. Now THAT impressed Byrne." The number of free stock screeners is dwindling 02/04/07   Stocks "A few weeks ago, BusinessWeek magazine shut down its free Quick Stock Search and Advanced Stock Search screeners. That's unfortunate, because BusinessWeek's screeners were easier to use than others with similar capabilities. If you're not familiar with the term, a screener is a program that allows you to search the entire market for stocks or mutual funds meeting your selection requirements. For instance, you could use a screener to list stocks with price/earnings ratios between 15 and 20, and annual sales greater than $20 billion. The demise of BusinessWeek's screeners leaves only two full-feature screeners that we can use for free, MSN Money's Deluxe Screener and Reuters' PowerScreener Lite. Both offer more screening choices than BusinessWeek's screeners did, but both take some time to learn. It's time well spent, however, and once you get the hang of using them, they'll become your best friends." What keeps bankers awake at night? 02/02/07   Markets "Nowadays, the banks have parcelled out the risk to hedge funds, pension funds and insurers. But has risk gone out the front door, only to come in the back, because of the banks' trading and financial relations with those same counterparties?" Personal savings rate falls to 74-year low 02/01/07   Economy "People once again spent everything they made and then some last year, pushing the personal savings rate to the lowest level since the Great Depression more than seven decades ago. The Commerce Department reported Thursday that the savings rate for all of 2006 was a negative 1 percent, meaning that not only did people spend all the money they earned but they also dipped into savings or increased borrowing to finance purchases. The 2006 figure was lower than a negative 0.4 percent in 2005 and was the poorest showing since a negative 1.5 percent savings rate in 1933 during the Depression." Extraordinary Popular Delusions 01/31/07   Books "Among the bubbles described by Mackay is the Dutch tulip mania of the early seventeenth century. According to Mackay, during this bubble, speculators from all walks of life bought and sold tulip bulbs and even futures contracts on them. Allegedly, some tulip bulb varieties briefly became the most expensive objects in the world, until the bubble burst in 1637. Other bubbles described by Mackay are the South Sea Company bubble of 1711.1720, and the Mississippi Company bubble of 1719.1720." [Note that the books themselves can now be downloaded for free.] CAPM is CRAP 01/29/07   Montier "As an empirical skeptic my interest lies in whether CAPM works. The evidence from the offset has been pretty appalling. Study after study found that beta wasn't a good measure of risk. For instance the chart below is taken from Fama and French's 2004 review of CAPM. Each December from 1923 to 2003 they estimate a beta for every stock on the NYSE, AMEX and NASDAQ using 2-5 years of prior monthly returns. Ten portfolios are then formed based on beta, and the returns tracked over the next 12 months. The chart below plots the average return for each decile against its average beta. The straight line shows the predictions from the CAPM. The model's predictions are clearly violated. CAPM woefully under predicts the returns to low beta stocks, and massively overestimates the returns to high beta stocks. Over the long run there has been essentially no relationship between beta and return." The Top 200 Stocks 01/26/07   Stingy Investing "Want to go hunting for buried treasure? Then join us as we once again dig up the shiniest prospects among Canada's largest 200 stocks in the third annual MoneySense Top 200. We're pleased to say that the first two versions of the Top 200 have been a great success. Look, for instance, at our All-Around All-Stars from last year. These were the handful of stocks that scored well for both good value and good growth prospects. Since we selected them in November 2005, they have gone up in price by an average of 37.6%. Fold in the 57.6% return from the 2004 version of the All-Around All-Stars and our top picks are up 116.8% over the past two years. Yes, you heard that right. Someone who invested in our All-Around All-Stars from 2004 then rolled their gains into our top picks from 2005 would have more than doubled their money in two years - and their 116.8% gain doesn't even include the dividends they would have collected along the way." Gimme more 01/26/07   Behaviour "The more money we have, the less we want to share with other people. Few of us like to think of ourselves as being greedy, although we might describe ourselves as being self-sufficient or financially independent. And many of us like to think that if we suddenly received a wind-fall, we'd share the wealth. Yeah, sure. The trouble is that self-perception is often very different from reality." Bill Miller's letter 01/25/07   Miller "Concentration works when the market has what the academics call fat tails, or in more common parlance, big opportunities. If I am considering buying three $10 stocks, two of which I think are worth $15, and the third worth $50, then I will buy the one worth $50, since my expected return would be diminished by splitting the money among the three. But if I think all are worth $15, then I should buy all three, since my risk is then lowered by spreading it around. For much of the past 25 years, there were those $10 stocks worth $50 around. For the past few years, they have been largely absent, as inter-industry valuations have only been this homogeneous about 2% of the time." Naked investing 01/25/07   Trusts "The Coalition of Canadian Energy Trusts makes the claim that they pay more taxes per dollar of revenue than non-trust energy companies. Nevertheless, they love being trusts. In fact, they love being trusts so much they are screaming mad that Flaherty is going to make them pay less tax. Yes, that's right. They must convert back to regular corporations over the next few years, and presumably--according to their own research, anyway--will end up paying much less tax. How dare you, Mr. Flaherty!" 101 dumbest moments in business 01/23/07   Fun "Business 2.0 Magazine's 7th annual look at the year in bungled layoffs, customer-service snafus, and other corporate madness." Casualty list 01/23/07   Dorfman "While the average stock rose about 7 percent in the fourth quarter, Archer-Daniels-Midland Co. fell 15 percent. That earns it a place -- along with Lincoln Educational Services Corp., Crane Co. and Motorola Inc. -- on my quarterly Casualty List. The list contains stocks that have been roughed up in the previous quarter, and that I think have good potential to recover and make new highs." You are what you expect 01/20/07   Behaviour "A couple of decades ago, the psychologist Shelley Taylor proposed that 'positive illusions' like excessive optimism were critical to mental health. People who saw their abilities and chances realistically, she noted, tended to be in a state of depression. (Other psychologists, taking a closer look at the data, countered that depressives actually show more optimism bias than nondepressives: given the way things turn out for them, they are not pessimistic enough.) And there is new evidence that optimism may in some ways be self-fulfilling." Ensure your property is deemed a principal residence 01/20/07   Taxes "Selling a home can be one of the most tax-efficient asset dispositions you'll ever make -- if your place qualifies as a principal residence, that is. But will it qualify?" Beware the minefields of a property 'change in use' 01/20/07   Taxes "Where a property is initially used as a residence, but you later completely or partly convert it to an income-producing property (such as a rental property), a "change in use" takes place. Likewise, where a property was income-producing and you later convert it completely or partly into a residence, the same "change in use" happens. A change in use will generally cause a deemed disposition of the property (or a portion of it) at fair market value under Canadian tax law. If the property has appreciated in value, there may be tax to pay on the capital gain." Keep the taxman at bay 01/20/07   Taxes "If you're concerned about CRA applying income rather than capital treatment to your transactions, there may be a good solution. On Nov. 30, CRA issued a technical interpretation (document 2006-0185041E5; you'll need to visit a tax pro if you hope to obtain a copy -- CRA won't be any help), which clarified that it's possible to segregate your portfolio into two parts: One part that may be treated on income account, and one that may be treated on capital account." Undervalued airline came in top of class 01/20/07   Value Investing "We all make mistakes. In fact, in May we hung out one of our own boneheaded moves, our "investment" in MRI manufacturer Fonar Corp. (FONR-Nasdaq). Though the stock had crashed to 26 cents from our purchase price of $1.25, we stuck with it because the chief executive officer had just bought shares at 55 cents, and management told a sweet story about the stock getting back over $1 by year end. No dice. We finally pulled the plug and took the tax loss at 30 cents, not far from its current trading price of 27 cents." The triumph of unreason? 01/18/07   Behaviour "People's shopping behaviour therefore seems to have piggy-backed on old neural circuits evolved for anticipation of reward and the avoidance of hazards. What Dr Loewenstein found interesting was the separation of the assessment of the product (which seems to be associated with the nucleus accumbens) from the assessment of its price (associated with the insular cortex), even though the two are then synthesised in the prefrontal cortex. His hypothesis is that rather than weighing the present good against future alternatives, as orthodox economics suggests happens, people actually balance the immediate pleasure of the prospective possession of a product with the immediate pain of paying for it." Robot shows it pays to buy outcasts 01/17/07   Dorfman "Canada has proven in the early going to be a profitable stomping ground for John Dorfman's robot stock selector. A portfolio of 10 out-of-favour stocks selected a year ago using the Boston money manager's automated filtering technique produced a hearty 31 per cent investment return. " Top NYSE stocks under $5 01/16/07   Stocks "In 2003, Tim Melvin, the co-author of recent bestseller The Little Book of Value Investing with Christopher Browne from Tweedy Browne, told me about a system he tested for 2002. At the beginning of every month, buy every stock below $3 on the NYSE. Sell at the end of the month and begin again." The voices in my head say 'Buy It!' Why argue? 01/16/07   Behaviour "Now that scientists have spotted the pain and pleasure centers in the brain, they.ve moved on to more expensive real estate: the brain.s shopping center. They have been asking the big questions: What is the difference between a tightwad's brain and a spendthrift's brain?" The Berkshire Hathaway portfolio 01/12/07   Buffett "Now you're probably thinking: Great, if Buffett himself thinks Berkshire's equity investments will only be slower growers, why should I be interested in them? Well, in my view, the ability to buy a fractional ownership interest in some great businesses at attractive prices with limited downside is still a very good proposition, especially when compared to the average investor's current opportunities." Words of wisdom from Warren Buffett 01/12/07   Buffett "Warm and fuzzy aren't words normally used to describe captains of industry. That is unless you're talking about Warren Buffett. He's the second-richest man on the planet, the best investor ever, one of the most significant philanthropists in world history--and yet he seems as down-to-earth and grandfatherly as say, Wilford Brimley. Buffett helps perpetuate this homespun mystique with his annual investor newsletters, which are chock full of folksy words of wisdom." New backdating scheme rips off stockholders 01/10/07   Crime "It's tempting to roll your eyes at the latest options backdating news - more evidence that in certain ways American executives are still the world's most creative. But in fact it's worth a closer look, because this type of conniving, which involves backdating exercise dates rather than grant dates, is different and in some ways worse. Bizarrely, while this book-cooking appears to be a tax scam, it may actually leave the U.S. Treasury better off than if the executives had been honest. What it reveals most strongly is some executives' utter contempt for their shareholders." Surviving (and thriving) on $12,000 a year 01/10/07   Thrift "I'll be living on just over $1,000 a month this year. That doesn't sound like much -- and it isn't -- yet I plan not just to live on it, but to build a savings account." Shifting sands 01/08/07   Economics "There is little doubt that Americans' incomes are more variable than they were a generation ago, but the story is a nuanced one. Mr Hacker's statistics are controversial. Peter Gottschalk, of Boston College, and Robert Moffitt, of Johns Hopkins University, were the first economists to disentangle how much of the rise in income inequality was due to long-term changes in earnings and how much to temporary instability. Their most recent report suggests that temporary earnings volatility rose sharply in the 1980s, fell in the 1990s and has risen again in recent years." The global gusher 01/07/07   World "When Thailand's introduction of capital controls sent its stockmarket plunging a few days before Christmas, you could have been forgiven for thinking, 'Here we go again.' It is almost ten years since the start of the Asian financial crisis, when capital flight on a huge scale caused financial markets and economies in the region to collapse. The problem that Thailand and other Asian countries face today, however, is the exact opposite: how to stop capital flowing in." Warren Buffett Q&A video 01/06/07   Buffett "The video is about 40 minutes long and contains a lot of great sound bites from Warren on investing, business and entrepreneurship." Decoding Alzheimer's 01/04/07   Health "It's particularly striking that the science is advancing despite a long-standing dearth of investment in Alzheimer's research. There are currently 4.5 million Alzheimer's patients in the U.S., and the direct and indirect costs of caring for them total more than $100 billion a year, making Alzheimer's the third most expensive illness after heart disease and cancer. Yet the federal government budgeted only $645 million for Alzheimer's research for 2007, $7 million less than the prior year. In contrast, $2.6 billion was allocated for research into HIV/AIDS, which afflicts one million Americans." Modern snake oil? 01/04/07   Health "Then-FDA Commissioner David A. Kessler testified that supplements should be treated much the same as drugs. But his rational arguments carried little weight with senators. The supplements industry ended up with the right to make all kinds of claims about their products without proof, and sales took off. The only supplements with unqualified support are calcium and vitamin D for women at risk of osteoporosis, folate for pregnant women, and fish oil, containing omega-3 fatty acids, for lowering cholesterol and blood pressure. Multivitamins, taken by more than half of all adult Americans, have been largely dismissed by the National Institutes of Health. Hurley offers a thorough, well-written account of the fallout from the DSHEA. He describes case after case, from ephedra, the weight-loss product that contributed to the death of Baltimore Orioles pitcher Steve Bechler, to teenagers dying from supplements meant to get them high "naturally." But his irate tone, however justified, gets wearing. And while properly attacking hucksters' claims, he lets another key player pretty much off the hook. That would be us, the customers." Robot's winning streak snaps at 7 years 01/02/07   Dorfman "The 'Robot' starts with the universe of U.S. stocks with a market value of $500 million or more. It eliminates those companies whose debt is greater than stockholders' equity, and also slices off those with negative earnings over the past four quarters. From the approximately 1,000 stocks that remain, the Robot selects the 10 with the lowest price-earnings ratios (stock price divided by the past four quarters' earnings)." I would not allow directors to be paid 01/02/07   Munger "Paying directors more is going to make the compensation excesses harder to fix. The more you pay directors, the more the directors are going to want to pay the CEO. Putting more duties on the directors and giving them more money is like trying to extinguish a fire by pouring gasoline on it. If I were running the world, I would not allow directors to be paid at all. I would make directors be exemplars and serve just as they serve on the boards of Harvard and Yale." Who's afraid of the big bad boss? 01/02/07   Management "Employees stuck in an abusive relationship experienced more exhaustion, job tension, nervousness, depressed mood and mistrust. They also were less likely to take on additional tasks, such as working longer or on weekends, and were generally less satisfied with their job. Also, employees were more likely to leave if involved in an abusive relationship than if dissatisfied with pay." Arnold Van Den Berg interview 01/01/07   Value Investing "Now there are basically four great psychological states you should look for. And you want to buy stocks that are selling for one of these four reasons. ... So you've got apathy, disgust, and fear and panic. But the ultimate state is anger." 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