Nassim Nicholas Taleb

This is without-a-doubt the best background piece on Taleb that I've read. Enjoy:

On a freezing day in March 2007, Nassim Taleb walked into a conference room at Morgan Stanley's Manhattan offices on 47th Street and Broadway to address a group of the firm's risk managers. His message: Your models don't work.

Using a whiteboard to scribble out his calculations, Taleb, now 48, began one of his rants, this time against stress tests -- Wall Street lingo for examining how a market rout will play out. Stress tests are inherently risky because they ignore rare but potentially devastating events, Taleb said.

``Past shortfall doesn't predict future shortfall,'' the options trader turned best-selling author recalls telling the assembled group of about 40. The risk managers, part of a tribe of mathematical model makers known in the finance world as quants, stared back at him blankly, and a debate ensued, according to people who were there..." Continue Reading

Books by Taleb: The Black Swan and Fooled By Randomness

Your opinion wanted: Why is Bear Stearns trading at $6 when it's been purchased at $2?

My blog is brand new and so I have low (read no) expectations of recieving any replies.

That said what are your thoughts? If BSC had been purchased by JPM for $2 a share in stock why is it trading at $6. The government has already approved the deal. Can't we just buy JPM and short BSC and profit on the spread? What am I missing? What rumors have you heard regarding a better bid?

I look forward any responses.

Bear Stearns: The Facts, Some Opinion, and Who Stands to Lose the Most

Wow what a difference a little time makes. In January Bear Stearns was worth $30 Billion and after Firday's firesale was worth about $3.5 Billion and now it sold for under $250 million dollars to JP Morgan Chase (JPM) yesterday. Essentially, BSC investors have been crushed.

The Facts:

The Merger Agreement (PDF)

JPMorgan to Buy Bear Stearns for $2 a Share in ALL Stock Deal

Some Opinion:

Todd Sullivan comments on what he feels like is an incredible bargain:
JP Morgan Dimon's Bargain Purchase
Todd left some room for doubt on whether the shareholders will approve the merger.

See who stands to lose the most and who the large shareholders are here:
A Stake Through the Heart

Weekend Reading

Weekend Reading From Value Investing News

1. Why Warren Buffet is richer than the Hedge Fund managers - a tale of two business models


2. Notes From A Conversation with Munger


3. Does the magic formula work?


4. Marvel - Superhero Value?



5. Berkowitz Sees Volatility As An Opportunity


6. A Solid Bet: The Case For Ternium Steel


7. Sneak Preview of The Four Filters by Bud Labitan


8. Free RSS Feeds for Company Filings on EDGAR

Is Buffett's Business Model More Lucrative than a Hedge Fund?

Arohan of Arohans's Investing Life thinks so:

The difference is in the business models. A hedge fund manager primarily derives his income from fees. The assets of the hedge fund are owned by investors in the fund and only a part of the growth in the value of this asset works towards increasing the net worth of the hedge fund manager...If you are a superlative investor (like Mr Buffet or like many of the better hedge fund managers), business ownership model of Berkshire Hathaway will generate greater wealth over a long period of time. Sure, running a hedge fund will get you to great riches quickly (adding lot of investors quickly, in the years where the fund does very well, etc), but it is not a superior wealth creation machine over long term" Continue Reading

Arohan has a great site and has sponsored my blog through Entrecard. So, if you found this article through Entrecard please "drop" on his widget.

Charlie Munger Interview

I highly recommend reading everything you can about Warren Buffett's partner Charlie Munger. If you are unfamiliar with him you are in for a treat. He is incredibly intelligent and he knows it -which adds a certain (well deserved) brashness and arrogance to his message. For me this makes him that much more engaging.

Here are some notes from a recent interview. I recommend visiting him at the Berkshire and Westco meetings so that you can experience him in person. I GUARANTEE you'll learn something.

Tonight I got to see A Conversation with Charlie Munger at Caltech in Pasadena. I took some notes on the discussion below. C refers to Charlie Munger speaking, while T stands for Tom Tombrello, the interviewer. These are not their exact words.


C: I love Occum's Razor (Wikipedia). Einstein once said make everything as simple as possible, but not simpler. In the field of messy social sciences, use a variety of disciplines and look for a confluence of factors when dealing with "lollapaloozas". (significant and strange events, black swans)

For example, I was fascinated about what made people join Moonies, a cult-like group. It didn't make sense until I ran into Pavlov, who experimented on dogs by pushing them to nervous breakdowns (He did this by locking them in cages and then raising the water level up to mouth height, making them think they were about to drown) . Afterwards, they would act in the complete opposite fashion. This was very similar to one of the Moonies conversion methods: "causing the target to snap".

Continue the Interview

Fwallstreet introduces a fantastic time saving tool.

If you haven't visited Fwallstreet you missing out. Joe writes very well and provides excellents tools and instructions on how to deal will difficult investing topics. Today he offered up a real gem:

Trying to separate the news from the noise? Tired of running all over the EDGAR database? Let your company come to you!

This new F Wall Street feature allows you to subscribe directly to a company's filings with the Securities & Exchange Commission's website. Simply enter the company's Central Index Key (CIK) number below and a feed will be generated with the last 100 filings. As new documents are filed, your feed will be updated."

Visit F Wallstreet to get started. (It's Free)

Home Economics

Americans may disagree about nearly everything, but few contest the idea that owning your home is a good thing...[BUT]Homeownership also impedes the economy’s readjustment by tying people down. From a social point of view, it’s beneficial that homeownership encourages commitment to a given town or city. But, from an economic point of view, it’s good for people to be able to leave places where there’s less work and move to places where there’s more. Homeowners are much less likely to move than renters, especially during a downturn, when they aren’t willing (or can’t afford) to sell at market prices. As a result, they often stay in towns even after the jobs leave. That may be why a study of several major developed economies between 1960 and 1996, by the British economist Andrew Oswald, found a strong relationship between increases in homeownership and increases in the unemployment rate; a ten-per-cent increase in homeownership correlated with a two-per-cent increase in unemployment. (In the U.S., it may be worth noting, the states that have the highest unemployment rates—states like Alabama, Michigan, Mississippi—are also among those with the highest homeownership rates.) And reluctance to move not only keeps unemployment high in struggling areas but makes it hard for businesses elsewhere to attract the workers they need to grow..."continue reading

Post of the Day: Great Businesses According to Buffett

Today's post of the day is from George at Fat Pitch Financials:

I finished digesting the latest Berkshire Hathaway 2007 letter to shareholders today. I found the most interesting part of this year’s letter was Warren Buffett’s discussion of what kinds of businesses turn him on.

The companies that he and Charlie Munger look for are:

1. Understandable
2. Businesses with favorable long-term economics
3. Run by trustworthy management
4. Selling at sensible prices

Mr. Buffett once again reiterates that “a truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital.” Fat Pitch Financials has been all about finding companies with wide moats ever since I first set up this blog in 2004. Given my economics background, I find Buffett’s arguement for the need for wide moats compelling. He argues that companies that lack a barrier to competition will succumb to the competitive forces of a capitalist market that tend to drive profits to zero."

Continue Reading

Double Feature:

First Post of the Day from Bloomberg:

Ambac fell $2.02 to $8.70 today in New York Stock Exchange composite trading. The shares have tumbled 90 percent in the past year. A $1 billion equity offering would about double the amount of shares outstanding.

Credit-default swaps tied to Ambac's AAA rated insurance unit rose 10 basis points after the announcement to 530 basis points, according to CMA Datavision in London. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Bank Losses

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

Banks would lose as much as $70 billion if the top-rated bond insurers lose their credit ratings, Oppenheimer & Co. analysts estimated in January. MBIA's ratings were affirmed by Moody's and S&P last week.

Continue

Better Yet Check out this Video:



Hat Tip to Value Plays

Post of the Day: 10 Investing Tips From Warren Buffett

From the 2007 Letter to Shareholders:

1. When you know you're the best, you can afford to tell it like it is. Buffett says: "Our insurance business had an excellent year... that party is over. It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. So be prepared for lower insurance earnings during the next few years."

2. Only four things really count when making an investment (or buying whole companies if, like Buffett, you have $141bn to spend) - "a business you understand, favourable long-term economics, able and trustworthy management, and a sensible price tag". That's investment, everything else is speculation.

3. Invest this way and you don't need to constantly look for the next "new" thing, with all the risk that necessarily entails.

Buffett's biggest investments (companies he doesn't own in their entirety) include American Express, Wells Fargo, Procter & Gamble and Coca-Cola.

These four businesses, he notes, were founded in 1850, 1852, 1837 and 1886 respectively. "Start-ups are not our game".

4. Businesses are run by people and the best people are not necessarily the ones with the flashiest CVs. Buffett singles out Susan Jacques, chief executive of his jewellery retailer Borsheims. "Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. She's smart, she loves the business and she loves her associates. That beats having an MBA degree any time."

Continue Reading
Hat Tip: Controlled Greed

Post of the Day: A Magic Formula Stock from 1972?

Shai Dardashti share with us Warren Buffett's Magic Formula Stock from 1972:

Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow. Many once-important brands have disappeared, and only three companies have earned more than token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues from only a few states, accounts for nearly half of the entire industry’s earnings.

At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.

Continue Reading

Post of the Day: Berkshire Hathaway Annual Report

Berkshire Hathaway Annual Report 2007