Guru Speak: An Interview with Buffett

Guru Speak: Sanjoy Bhattacharya & Raamdev Agarwal

Sanjoy Bhattacharya is always great to listen to. Great intellect.

Guru Speak: Buffett Partnership Letters (1957 to1970) - Key Takeaways and Learnings - Part III

In continuation of reading the Buffet Partnership Letters, here is the 3rd part in the series. You can read the previous posts here:
Part I
Part II

On being contrarion and doing your due diligence:

You will not be right simply because a large number of people momentarily agree with you. You will not be right simply because important people agree with you. In many quarters the simultaneous occurrence of the two above factors is enough to make a course of action meet the test of conservatism.  You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct. True conservatism is only possible through knowledge and reason.

The hallmark of value investing. Buy cheap!

This is the cornerstone of our investment philosophy: “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake.”

On the kind of management he likes.

On Harry Bottle who took over as President of Dempster Mills once Buffet bought controlling stake - "Harry had never thought of running an implement company six days before he took over. He is mobile, hardworking and carries out policies once they are set. He likes to get paid well for doing well, and I like dealing with someone who is not trying to figure how to get the fixtures in the executive washroom gold-plated."

Market fluctuations and how it really does not matter much.

I think you can be quite sure that over the next ten years, there are going to be a few years when the general market is plus 20% or 25% a few when it is minus on the same order, and a majority when it is in between. I haven’t any notion as to the sequence in which these will occur, nor do I think it is of any great importance for the long-term investor. 

When to walk away if you do not understand the transaction. Ignore tips.

Early in 1962 I heard rumors regarding a sellout to Union Oil of California. I never act on such information, but in this case it was correct and substantially more money would have been made if we had gone in at the rumor stage rather than the announced stage. However, that's somebody else's business, not mine.

Guru Speak: Charlie Munger - Speech at Harvard-Westlake School

Charlie Munger is my guru and a person who I have infinite respect for. Anything he says is worth its weight in gold. His thoughts are not only on investing but on life as well.Munger Talk at Harvard-Westlake

Guru Speak: Warren Buffet's Partnership letters from 1957-1970

Warren Buffet's early days as an investment manager is documented in these letters. This was before the Berkshire Hathaway days when he managed money of friends, relatives and other known people.

For his Berkshire partnership letters, you can go to the Berkshire Hathaway website. You can also read "The Essays of Warren Buffet" by Lawrence Cunningham for a topic-by-topic coverage of the annual letter contents. Incidentally, this is one book that Warren Buffet himself recommends reading.

Buffett Partnership Letters 1957-1970

Guru Speak: Charlie Munger

A couple of old videos of Munger, but worth watching over and over.


University of Michingan-2010



Talk at Caltech-2008 

 

Guru Speak: Seth Klarman interviewed by Jason Zweig

I have been a great admirer of Seth Klarman since the time I read his book "Margin of Safety". recently, I came across a transcript of an interview that Jason Zweig of the Wall Street Journal conducted in May 2010. Here are some of the important snippets from the interview.

JZ: What went wrong in 2008, and how did so many Value Investors get hammered?
SK: Value investing doesn’t work all the time, you need to expect periods of underperformance.  In the Pre 08 period, the world was valued on an invisible LBO Model.  Stocks were not allowed to get cheap because of an underlying expected LBO bid.  But when the model got fragmented, the template no longer made sense.  So in order to do well, equity minded investors needed to be more agile in 07/08 and have an opinion on subprime mortgages and the ripple effect.  Bank stocks looked cheap unless you thought their capital would be destroyed.  Also the modern day pressure to be fully invested and on short term performance didn’t help.


JZ: In 1932, Benjamin Graham wrote in Forbes, “Those with the enterprise lack the money and those with the money lack the enterprise to buy stocks when they are cheap.” How did you have the courage, was it easy to step up and buy in the fall of 2008?
SK: “Yes, it was easy.” The critical thing to understand is that securities are not pieces of paper that fluctuate in price tick by tick, instead they are in fact claims on earnings or assets of businesses. If you have conviction in your analysis, you will hold and buy more.  So what do we do to give us conviction? 

1.) Find compelling bargains, not slight bargains. 

2.) Test everything with sensitivity analysis.  

3.) Prepare to be wrong.  

It’s not courage, it’s arrogance, when you buy something, you’re saying you’re smarter than everyone else.  We realize we have lots of smart competition and temper our arrogance with
humility to realize that many things could go wrong.  Our own confidence matters, and we’re highly disciplined buyers and sellers to avoid round trips and take advantage of short term sell offs. Courage is a function of process.

JZ: In Margin of Safety, you were critical of Indexing, is that still the case?
SK: There is no perfect answer.  Yes, I still believe indexing is a horrible idea.  Stocks trade up when they’re added to the index so the index investor is paying up.  I’m more likely to buy the companies kicked out of the index.  For the average person, however, they don’t do enough research to own individual stocks.  The idea of owning stocks for the long run is a disservice to investors, because many of the people are not there for the long run.  Many got out in 2008 when they should have been buying, because the entry point matters most.

JZ: In Margin of Safety, you said commodities were not investments since they do not
produce cash flows, one possible exception being gold.  Do you still feel this way?
SK: I haven’t changed my mind, but that statement was in reference to rare stamps, or fine art, etc.   Valuing collectibles based on a future sale to a greater fool is speculating.  There is no way to analyze what it will be worth in the future.  Land is complicated because it will be valuable to future buyers and it can have cash flows. Gold has been thought of as a store of value but it is just a commodity and therefore it is a speculation.  I own gold because I want exposure to a devaluation of all paper monies.

JZ: Everyone says it’s never the analyst’s fault, but often they don’t stick to this when something goes wrong. How do you screen for Intellectual Honesty in your hiring process?
SK: We ask about their biggest mistake, which doesn’t have to be investing related. But if you say your biggest mistake is wearing mis-matched socks one day, then that’s likely not being intellectually honest.  We ask ethical questions, ask them how they’d respond in morally ambiguous situations, we want to see that they realize conflicts can exist.  We want people who fit in.  One key thing is idea fluency, if I present a thesis I want people to immediately come up with 10 places to look to exploit it, I don’t want them sitting at their desk thinking, “hmm, where should I look?"

JZ: What about the individual investors whose sell orders went off at $0.01? {This question was in relation to computer-based short selling.}
SK: Never use market orders. You’re not a seller at the market, the market changes
too fast.

JZ: Can you define a Value Stock and what is your average holding period?
SK: As for a Holding Period, we buy expecting to hold a bond to maturity and a stock forever.  Now we may turn over quicker if there’s rapid appreciation and the return from the current price doesn’t seem to compensate for the risks anymore.  There’s no such thing as a Value Company.  Price is all that matters. At some price, an asset is a buy, at another it’s a hold, and at another it’s a sell.

JZ: Any Book Recommendations (besides Margin of Safety and Security Analysis, of
course)?
SK: Read as much as you can about the markets, economy, and financial history. Never stop reading.  Specific book recommendations include "The Intelligent Investor", Greenblatt’s "You Can Be A Stock Market Genius", Whitman’s "Aggressive Conservative Investor", Anything from Jim Grant (he’s a great thinker, even if his predictions may not turn out right), Roger Lowenstein has not written a bad book, anything from him. Also Michael Lewis, who also hasn’t written a bad book either, but specifically "MoneyBall" which will go down as a definitive book on investing.  Also "Too Big to Fail" is good.
JZ: I’ll add "How to Lie with Statistics".

GuruSpeak: George Soros on Euro

The legendary investor George Soroshas some radical views on the Euro and Euro zone.

Angela Merkel then declared that the guarantee should be exercised by each European state individually, not by the European Union or the eurozone acting as a whole. This sowed the seeds of the euro crisis because it revealed and activated a hidden weakness in the construction of the euro: the lack of a common treasury. The crisis itself erupted more than a year later, in 2010.

... at present in the eurozone one of these authorities, the common treasury, has yet to be brought into existence. This requires a political process involving a number of sovereign states. That is what has made the problem so severe.

The outlines of the missing ingredient, namely a common treasury, are beginning to emerge. They are to be found in the European Financial Stability Facility (EFSF)—agreed on by twenty-seven member states of the EU in May 2010—and its successor, after 2013, the European Stability Mechanism (ESM). But the EFSF is not adequately capitalized and its functions are not adequately defined. It is supposed to provide a safety net for the eurozone as a whole, but in practice it has been tailored to finance the rescue packages for three small countries: Greece, Portugal, and Ireland; it is not large enough to support bigger countries like Spain or Italy. Nor was it originally meant to deal with the problems of the banking system, although its scope has subsequently been extended to include banks as well as sovereign states. Its biggest shortcoming is that it is purely a fund-raising mechanism; the authority to spend the money is left with the governments of the member countries. This renders the EFSF useless in responding to a crisis; it has to await instructions from the member countries.

 

The seeds of the next crisis have already been sown by the way the authorities responded to the last crisis. They accepted the principle that countries receiving assistance should not have to pay punitive interest rates and they set up the EFSF as a fund-raising mechanism for this purpose. Had this principle been accepted in the first place, the Greek crisis would not have grown so severe.

These two deficiencies—no concessional rates for Italy or Spain and no preparation for a possible default and defection from the eurozone by Greece—have cast a heavy shadow of doubt both on the government bonds of other deficit countries and on the banking system of the eurozone, which is loaded with those bonds.

In any case the current intervention has to be limited in scope because the capacity of the EFSF to extend help is virtually exhausted by the rescue operations already in progress in Greece, Portugal, and Ireland.

In these circumstances an orderly default and temporary withdrawal from the eurozone may be preferable to a drawn-out agony. But no preparations have been made. A disorderly default could precipitate a meltdown similar to the one that followed the bankruptcy of Lehman Brothers, but this time one of the authorities that would be needed to contain it is missing.

It appears that the authorities have reached the end of the road with their policy of “kicking the can down the road.” Even if a catastrophe can be avoided, one thing is certain: the pressure to reduce deficits will push the eurozone into prolonged recession. This will have incalculable political consequences. The euro crisis could endanger the political cohesion of the European Union.

To resolve a crisis in which the impossible becomes possible it is necessary to think about the unthinkable. To start with, it is imperative to prepare for the possibility of default and defection from the eurozone in the case of Greece, Portugal, and perhaps Ireland. To prevent a financial meltdown, four sets of measures would have to be taken. First, bank deposits have to be protected. If a euro deposited in a Greek bank would be lost to the depositor, a euro deposited in an Italian bank would then be worth less than one in a German or Dutch bank and there would be a run on the banks of other deficit countries. Second, some banks in the defaulting countries have to be kept functioning in order to keep the economy from breaking down. Third, the European banking system would have to be recapitalized and put under European, as distinct from national, supervision. Fourth, the government bonds of the other deficit countries would have to be protected from contagion. The last two requirements would apply even if no country defaults.

You can read the full article here:
http://www.nybooks.com/articles/archives/2011/oct/13/does-euro-have-future/