Posts Tagged ‘Excerpt’

Barry Ritholtz Discusses Investing (in a Secular Bear Market) with Forbes

Friday, June 1st, 2012

I did a rather lengthy interview with the delightful Wally Forbes last week. It went up on the Forbes site yesterday afternoon, and is worth a read:

Here’s an excerpt

“I may have mentioned this last time we spoke. In a secular bear market, like 1966-1982 bear or the secular bear market that began in March of 2000, our primary goal is to manage risk and protect capital.

It’s kind of funny that after the 2008 collapse everybody has been mouthing those words. But, we’ve been saying that for ten years now. This is a secular bear market and you have to be very much aware of lots of volatility – strong rallies up, strong collapses down. If history is your guide, than you should expect to see five major swings from the bottom to the top and back before this whole mess is over.

Right now we’re probably on the third leg. You had the initial crash in 2000-02/03, strong rally, big crash in 2008-09, big rally and if history holds true we should see one more major correction before the secular bear market is over.

History also tells us that, typically speaking, the middle collapse is the worst of all. So the 1973-74 lows, or in our case the March 2009 low is probably the worst of the collapse. Again, understanding the broader historical patterns doesn’t change what we do day to day, but it very much colors our longer term thinking. It makes us say, “Hey, there’s probably something out there in the latter half of 2012, maybe 2013. That’s going to be the next great buying interval. That will be the next time we go 90-100% long  equities.”

and this:

“Here’s the thing to keep in mind, and investors forget about this: There are keys to long-term performance, three major issues that you always have to recognize. One, you can’t have giant losses. Two, you have to keep the fee structure as modest as possible. Three, very often the less you do, the better off you are. The last one is really hard, because everybody comes into the office everyday and there’s a temptation to do something constantly. The expression, “Don’t just do something. Sit there,” really is true.”

 

Source:
Buy ConocoPhillips, Keep An Eye On Walmart And EMC
Barry Ritholtz, CEO and Director of Equity Research, Fusion IQ
Wally Forbes
Forbes 5/31/2012 @ 12:00PM

http://www.forbes.com/sites/wallaceforbes/2012/05/31/buy-conocophillips-keep-an-eye-on-walmart-and-emc/

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Volatility is Not Risk (Carnevale)

Friday, April 13th, 2012

 

by Chuck Carnevale, FAST Graphs

This article was inspired by Roger Nusbaum’s post on his Random Roger blog – Sunday Morning Coffee on Sunday, April 8, 2012.  Roger is a highly respected financial blogger that I believe is genuinely interested in providing his readers meaningful and prudent investment advice and guidance.  Therefore, I have a great deal of respect for his work and intentions. On the other hand, Roger and I often disagree on certain investing principles, especially those that deal with asset allocation, proper diversification and the definition of risk.  However, I would hope that he respects my differing views as being offered with the same best of intentions, as I see his offerings.

The Greater Risk is People’s Reaction to Volatility

Roger’s blog dealt with his feelings about a recurring theme in Barron’s over the weekend referencing people’s complacency for risk. The first part of his writing dealt with the risks associated with the utilization of puts.  On this subject, Roger and I are in agreement.  However, the second part of his blog talked about what he obviously felt was the great risk of using dividend paying equities as an alternative investment choice.  The following excerpt introduces his views, which frankly, up to this point, I take little exception to:

“The other point from Barron’s (this was repeated in a couple of places) was a repeat of the idea that the Fed’s interest rate policy (and the other attempts to stimulate the economy) are forcing investors into other instruments to seek a “reasonable return.”

However, I do take exception to his next paragraph as I felt that it is overstating the risk associated with the utilization of dividend paying stocks for two primary reasons.  First of all, his assumption that a bear market will provide a tragic outcome because dismayed investors will panic is more assumption than fact. Second, his last sentence insinuates, at least in my opinion, that dividend paying stocks are not safe investments.

“I hate this line of thinking. It would be great to get a “reasonable” rate of return from cash and treasuries but for now that is not the case. That people put what should be their low risk dollars into higher risk instruments to get a return they used to get from cash has tragic outcome written all over it. If there is another bear market before interest rates normalize there will be an avalanche of dismayed investors panic selling their dividend stocks because they thought the stocks were “safe.”

But it was with the last couple of sentences of his blog post that I took the greatest exception.  More precisely, I found that his example of Phillip Morris International (PM) to be misleading.  However, not because of what Roger included, but rather because of what he left out. I will elaborate more right after the following excerpt where he closed out his blog post:

“All stocks have strong and weak holders and I promise you that the weak holders will sell into the face of something bad–this is normal market behavior and has nothing to do with the merits of a stock or a strategy. I believe a client holding Philip Morris Intl (PM) is favorably viewed by the dividend crowd yet it went down 32% from when it spun off in March 2008 into the March 2009 low–weak hands not bad stock.”

It is certainly possible, and perhaps even probable that Roger is correct in assuming that so-called “weak holders” may in truth do as he suggests and panic sell. However, I believe a lot of that “normal market behavior” can greatly be attributed to the preponderance of negatively biased information that is promogulated upon the general public, especially regarding equities and how risky they are.  In other words, if people were offered a more reasoned perspective, then perhaps much of the irrational and catastrophic panic selling that Roger alludes to could be avoided.

The following analysis utilizing the F.A.S.T. Graphs™ earnings and price correlated research tool on Philip Morris International illuminates the important parts that I feel Roger’s comment left out. Roger is correct regarding how far that Philip Morris International’s stock price dropped, as can be seen by reviewing the black monthly closing stock price line marked by the flags on the graph.  Phillip Morris International’s stock price did, in fact, fall by the 32% plus number that Roger presented, and as he also stated, can most likely be attributed to “weak hands.”  However, what his comment left out was the fact that the company’s operating earnings were stable and continued to grow.  More simply stated, the stock price fell even though the company’s operating results remained strong and solid.

Therefore, investors armed with that information could have seen that this low point in Philip Morris International’s stock price represented an incredible opportunity not a high risk. The smart money (strong hands) would have added to their positions in this high-quality company that was continuing to post good results and raised its dividend every year, rather than sell out.  However, even if no one added money and simply held on they would have been given a substantial increase in their dividend each year and had their stock price rise from the original $50 a share to the more than $80 a share that it currently trades at (see flags on graph). The risk was not in the volatility itself, true risk would have been irrationally reacting to the volatility.

My point is that price volatility in itself is not risk, in my opinion, true risk is how people react to volatility when it occurs. Moreover, I believe that the reason there are so many “weak hands” is because of the weak information that investors are inundated with.  Knowledge is power, and I believe that if people were provided with greater knowledge on how equities, especially dividend paying equities, truly work, then we would be cultivating a lot more strong hands.  At the end of the day, this could also reduce the level of volatility by reducing the level of panic that would result from a better informed public.

Risk, Diversification and Prudent Behavior

In an attempt to summarize my views on diversification and how they differ from Roger’s I offer the following.  The principles of proper diversification are both important and sound, and therefore should never be neglected when developing an asset allocation strategy.  Moreover, the principles of proper diversification are valid and necessary when dealing with uncertain markets, but especially during times when markets are functioning (plus or minus) in a normal manner. Therefore, I am comfortable with and embrace a strategy of diversifying across numerous asset classes as long as each asset class makes sound and prudent economic sense at the time. However, when, and if, an asset class sits at an extreme level, then I feel it is imprudent to utilize it for the sole sake of so-called diversification.

I believe bonds of all types are currently sitting at such an extreme.  Traditionally thought of as safe investments, I believe that over the next four or five years bond prices could show more downside volatility than equities did even during the great recession of 2008.  Under normal times, bonds would offer yields that were several percentage points higher than quality dividend paying stocks.  Consequently, bonds were attractive due to the higher level of income they offered and were relatively stable as long as interest rates remained within historical normal ranges. Today that is not true.

As a result, I currently eschew the asset class bonds in favor of high-quality blue-chip dividend paying stocks. To be clear, when bond yields move back to more normal levels I would once again be happy to embrace including them in a properly diversified asset allocation plan.  But at today’s low rates, I believe that the traditionally safe bond has become one of the riskier asset classes, especially if you consider the potential for high volatility with their prices as risk. My point is, my aversion to bonds is a temporary one that would change if and when interest rates normalize and stabilize.

Therefore, to mindlessly invest in an obviously dangerous asset class for the sole sake of diversification does not make sense to me. We believe that investors should always think their way through the process of allocating their assets when building their portfolios. On the other hand, I don’t believe that money should be forced into an asset class when it doesn’t make economic sense just because you hold the notion of diversification as sacred.

Diversification when properly applied is a great way to control risk.  But investing in an asset class that is upside down solely for the purpose of diversification when it can be obviously avoided makes no sense to me.  Technology stocks during the 1999 bubble were a case in point. All you had to do was run the numbers and you could have quickly determined that there was no economic value in technology stocks at that time.

In contrast, today when looking at quality blue-chip dividend paying stocks that are trading at historically low valuations thereby offering above-average and growing yields, makes a lot of sense to me. I would argue that because of historically low valuations, they have never been a safer investment choice than they are today. And, the only reason to consider a Dividend Aristocrat or a Dividend Champion, at least to my way of thinking, is because you intend to own it for a very, very long time. Therefore, you cannot avoid short to intermediate term volatility, nor should you try.  Instead you should accept it as an unavoidable fact of the market. Otherwise, a record of increasing the dividends every year for 25 straight years or more doesn’t really seem relevant, unless you were going to hold for many years.

Not All Price Drops are the Same

A final point I would like to introduce is the idea that not all price drops are the same.  Sometimes the drop in a company’s stock price is justified and the harbinger of real systemic issues. At other times, a drop in the price of a stock can represent an incredible opportunity to buy an excellent business that has unjustifiably gone on sale.  Making these distinctions regarding volatility is a critical differentiation that should be made.

Furthermore, it’s also valuable to be able to identify and determine whether an interruption of a company’s business is a temporary one or a more permanent phenomenon.  Because, there are times when the drop in price of a stock is a sell signal, and there are times when it represents an attractive buying opportunity. The following discussion is offered to illustrate examples of the many faces of stock price volatility to include the good, the bad and the ugly.  These are just a few select examples, and there are many others that I could have used.

Bank of America an Ugly Price Drop

Our first example looks at Bank of America (BAC), and represents a quintessential example of an operating meltdown due to the now infamous financial crisis. Bank of America’s stock price fell from a high of over $55 to a low of $2.53, which followed an earnings collapse from $4.65 in calendar year 2006 to a loss by calendar year 2009 (see red highlight at bottom of graph).  Therefore, since both earnings and price collapsed, not only was the price drop justified, but the recovery may be years away, if ever.  This is why I consider this an ugly price drop.

General Electric – a Bad Price Drop and an Ugly Price Drop

In the case of General Electric (GE), there are actually multiple variations of different kinds of price drops.  First, we can see that in calendar year 2000 General Electric’s stock price had become massively overvalued.  Consequently, even though earnings continued to look good for several years, the falling prices in 2001 and 2002 were justified due to excessive valuation. Then, of course, we see a price drop where prices followed earnings down during the financial debacle in 2008 and 2009.  In this case, recovery should be sooner than what we saw with Bank of America, although it still looks like it’s still going to be many years away. 

Wells Fargo – a Bad Price Drop Getting Better

Wells Fargo & Co. (WFC) represents a financial that had a bad price drop that followed a similar drop in earnings.  However, earnings have subsequently recovered and stock price recovery has already been good to the extent that it may soon eclipse historical highs.

Cognizant Technology Solutions – A Good Price Drop

My last example looks at a company that had its stock price drop significantly during the great recession, while operating earnings continued to increase at a very strong rate.  Consequently, this represents an example of a good price drop that created an extraordinary bargain.  Therefore, price recovery has already dramatically exceeded historical highs (see price flags on graph).

The point with this exercise was simply to illustrate that a drop in a company’s stock price is not always a bad thing. Sometimes it is, as we saw with the Bank of America example, and sometimes it represents a great opportunity as illustrated by the Cognizant Technology Solutions’ example.  I believe that investors need to make these types of distinctions in order to truly be able to make sound and proper buy,sell or hold decisions. In other words, sometimes the price drop is justified and sometimes it’s not.

Summary and Conclusions

As I mentioned in the opening of this article, it was inspired by comments that were made by a financial blogger that I respect.  On the other hand, there was much about what he wrote that I disagreed with,and therefore, I felt compelled to offer my opposing views.  On the other hand, I cannot argue with his position regarding weak or strong hands.  It is true, that many investors, because they are ignorant of the facts, can and will panic during periods of market turbulence.  However, what I disagreed with most was the fatalistic attitude surrounding the notion that equities were bad because investors would panic.

I once read a quote attributed to Bob Veres, a respected columnist for the financial planning community that at its essence summarizes my view. I offer it as a pseudo-quote because I maybe interjecting a little paraphrasing:

“the definition of an excellent investment advisor is one who possesses the courage and integrity to insist that his clients do what they should do, rather than what they want to do.”

In my way of thinking, I believe it is our responsibility as professional financial advisors and bloggers to educate our clients and readers to factual and valid principles of sound investing practices.  To suggest that it’s a bad idea for investors to own equities only because you believe they will panic because their hands are weak, is not a valid recommendation, in my humble opinion.  Instead, I believe it’s incumbent upon us to offer the correct information and education that will prevent investors from behaving in irrational ways that could hurt their long-term investment results.

Furthermore, the bottom line is that I believe that equities, especially blue-chip dividend paying equities are being given a bad rap from this attitude by suggesting they are riskier than, in fact, they truly are.  The truth is that blue-chip companies such as Procter & Gamble (PG), Johnson & Johnson (JNJ) and many others too numerous to mention, have long legacies spanning decades of operating excellence and increasing dividends.  To classify them as risky investments based on simply the idea that pricing can be volatile, is in my way of thinking, an injustice.

If these blue-chip companies are purchased at reasonable valuations based on fundamentals, then the prudent investor can and should be capable of owning them over long periods of time. On the best ways to do this is to make the distinction between emotionally-driven price volatility versus permanent deterioration of the company’s long-term fundamentals.  As I stated before, both competent mountain climbers and Dividend Growth Investors recognize that the only way to get to the highest peak is to be willing to traverse the occasional valley along the way. We should not be telling investors that they are too dumb or weak-minded to own stocks, instead, we should be educating them on the true benefits and risks that come with owning them. Knowledge is power.

Disclosure:  Long CTSH, PG at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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How to Make Money in Microseconds

Sunday, May 15th, 2011

How to Make Money in Microseconds

by Donald Mackenzie (excerpt)

Human beings can, and still do, send orders from their computers to the matching engines, but this accounts for less than half of all US share trading. The remainder is algorithmic: it results from share-trading computer programs. Some of these programs are used by big institutions such as mutual funds, pension funds and insurance companies, or by brokers acting on their behalf. The drawback of being big is that when you try to buy or sell a large block of shares, the order typically can’t be executed straightaway (if it’s a large order to buy, for example, it will usually exceed the number of sell orders in the matching engine that are close to the current market price), and if traders spot a large order that has been only partly executed they will change their own orders and their price quotes in order to exploit the knowledge. The result is what market participants call ‘slippage’: prices rise as you try to buy, and fall as you try to sell.

In an attempt to get around this problem, big institutions often use ‘execution algorithms’, which take large orders, break them up into smaller slices, and choose the size of those slices and the times at which they send them to the market in such a way as to minimise slippage. For example, ‘volume participation’ algorithms calculate the number of a company’s shares bought and sold in a given period – the previous minute, say – and then send in a slice of the institution’s overall order whose size is proportional to that number, the rationale being that there will be less slippage when markets are busy than when they are quiet. The most common execution algorithm, known as a volume-weighted average price or VWAP algorithm (it’s pronounced ‘veewap’), does its slicing in a slightly different way, using statistical data on the volumes of shares that have traded in the equivalent time periods on previous days. The clock-time periodicities found by Hasbrouck and Saar almost certainly result from the way VWAPs and other execution algorithms chop up time into intervals of fixed length.

The goal of execution algorithms is to avoid losing money while trading. The other major classes of algorithm are designed to make money by trading, and it is their operation that gives rise to the spasms found by Hasbrouck and Saar. ‘Electronic market-making’ algorithms replicate what human market makers have always tried to do – continuously post a price at which they will sell a corporation’s shares and a lower price at which they will buy them, in the hope of earning the ‘spread’ between the two prices – but they revise prices as market conditions change far faster than any human being can. Their doing so is almost certainly the main component of the flood of orders and cancellations that follows even minor changes in supply and demand.

‘Statistical arbitrage’ algorithms search for transient disturbances in price patterns from which to profit. For example, the price of a corporation’s shares often seems to fluctuate around a relatively slow-moving average. A big order to buy will cause a short-term increase in price, and a sell order will lead to a temporary fall. Some statistical arbitrage algorithms simply calculate a moving average price; they buy if prices are more than a certain amount below it and sell if they are above it, thus betting on prices reverting to the average. More complicated algorithms search for disturbances in price patterns involving more than one company’s shares. One example of such a pattern, explained to me by a former statistical arbitrageur, involved the shares of Southwest Airlines, Delta and ExxonMobil. A rise in the price of oil would benefit Exxon’s shares and hurt Delta’s, while having little effect on Southwest’s (because market participants knew that, unlike Delta, Southwest entered into hedging trades to offset its exposure to changes in the price of oil). In consequence, there was normally what was in effect a rough equation among relative changes in the three corporations’ stock prices: Delta + ExxonMobil = Southwest Airlines. If that equation temporarily broke down, statistical arbitrageurs would dive in and bet (usually successfully) on its reasserting itself.

No one in the markets contests the legitimacy of electronic market making or statistical arbitrage. Far more controversial are algorithms that effectively prey on other algorithms. Some algorithms, for example, can detect the electronic signature of a big VWAP, a process called ‘algo-sniffing’. This can earn its owner substantial sums: if the VWAP is programmed to buy a particular corporation’s shares, the algo-sniffing program will buy those shares faster than the VWAP, then sell them to it at a profit. Algo-sniffing often makes users of VWAPs and other execution algorithms furious: they condemn it as unfair, and there is a growing business in adding ‘anti-gaming’ features to execution algorithms to make it harder to detect and exploit them. However, a New York broker I spoke to last October defended algo-sniffing:

I don’t look at it as in any way evil … I don’t think the guy who’s trying to hide the supply-demand imbalance [by using an execution algorithm] is any better a human being than the person trying to discover the true supply-demand. I don’t know why … someone who runs an algo-sniffing strategy is bad … he’s trying to discover the guy who has a million shares [to sell] and the price then should readjust to the fact that there’s a million shares to buy.

Continue Reading

 

Donald MacKenzie is a professor of sociology at Edinburgh University. His books include An Engine, Not a Camera: How Financial Models Shape Markets and Material Markets: How Economic Agents Are Constructed.

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Marc Faber: “The bad news is essentially out”

Wednesday, August 4th, 2010

In this video clip, Marc Faber, author of the Gloom, Boom & Doom Report, discusses China’s economy. Faber, speaking with Deirdre Bolton on Bloomberg Television’s “InsideTrack”, also talks about Chinese stocks and interest-rate policy.

Here is an excerpt:

“I’ve been arguing this year that the economy would inevitably slow down, because the impact of the stimulus would diminish. But having said that, the economy hasn’t crashed yet. It could still crash. But on the other hand, if you look at the performance of equities worldwide, it seems that the worse the economic news is, that the more the markets go up, because the market participants expect further easing measures, and maybe further stimulus. So altogether I would say it’s not going to be a disaster for stock investors yet.

“It’s interesting. The Chinese stock market began to discount the slowdown in economic growth actually precisely a year ago, in August, 2009. The market peaked out. And then drifted lower, but now that the bad news is essentially out, the market has started to rebound.”

Source: Bloomberg (via YouTube), August 2, 2010.

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Howard Marks: “It’s Greek to Me”

Thursday, July 22nd, 2010

Howard Marks of Oaktree’s latest follows, with an excerpt first:

As I mentioned above, debt isn’t the problem, or the cause of the problem.  But it has been the facilitator.

In “The Long View” (January 9, 2009), I wrote (albeit without reference to Greece) about a strong uptrend over the last few decades in what I called “expansiveness”:

Every business, government, non-profit organization or individual has a certain amount of equity capital, net worth or surplus.  That capital, in turn, will support a certain level of activity: production and sales, lending, government action, charitable grants or consumption.  But over the last several decades, if you wanted to do more of these things than your capital permitted, you could borrow capital from someone else.

Without credit – I think back to my pre-credit card college days of 45 years ago, for example – you couldn’t spend money you didn’t have.  Thus you couldn’t buy things you couldn’t afford.  Then the miracle of credit came along and it became easy to get in over your head.

What would have happened if governments couldn’t finance deficits by issuing debt?  Greece would only have been able to pay the benefits it could afford.  Less pleasant, but perhaps healthier.

The rest is after the jump.

h/t Paul Kedrosky

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What are the Origins of Groundhog Day?

Tuesday, February 2nd, 2010

Ever asked yourself, what is this Groundhog Day thing anyway?

This excerpt is courtesy of National Geographic, February 1, 2010.

Video: Wild Groundhog in “Action”

Groundhog Day Origins

According to the official Punxsutawney Phil Groundhog Day Web site, Groundhog Day is the result of a blend of ancient Christian and Roman customs that came together in Germany.

In the early days of Christianity in Europe, clergy would distribute blessed candles to the faithful on February 2 in honor of Candlemas, a holiday celebrating the Virgin Mary’s presentation of Jesus at the Temple in Jerusalem 40 days after his birth.

Along the way, February 2 also became associated with weather prediction, perhaps due to its proximity to the pagan Celtic festival of Imbolc—also a time of meteorological superstition—which falls on February 1.

Tradition held that the weather on Candlemas was important: clear skies meant an extended winter.

Legend has it that the Romans also believed that conditions during the first days of February were good predictors of future weather, but the empire looked to hedgehogs for their forecasts.

These two traditions melded in Germany, and was brought over to the United States by German immigrants who settled in Pennsylvania. Lacking hedgehogs, the German settlers substituted native groundhogs in the ritual, and Groundhog Day was born.

Source: NationalGeographic.com

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Why American Consumers Will Spend Lavishly Again

Monday, November 30th, 2009

Via Harvard Business -An excerpt:

Let me introduce you to Susan Householder.* Here she is, standing in the entrance of her garage in a middle class suburb of Ridgefield, New York. She is surveying a mountain of stuff: bicycles, toboggans, a work bench, exercise equipment, canned goods, Christmas decorations, a picnic hamper, board games, lots of wrapping paper, several boxes of stem ware, and lots and lots of containers, contents unknown. There’s so much stuff here, this ceased to be a garage a long time ago. It’s now a storage locker, Susan’s very own U-Store-It. (Cars are consigned to the drive way.) If we wanted a monument to all the spending Susan did in the 00s, this is it.What created this mountain of stuff? Was it irrational exuberance and cheap money? It was not. This crowded garage springs from cultural motives. These things were not purchased to express vanity or pursue status. They were purchased to help Susan build a life.

Source: Harvard Business

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Jeremy Seigel: Stocks for the Long Run (Still Alive)

Friday, October 9th, 2009

Jeremy Siegel, Wharton School Professor, has recently published an op-ed in FT.com, arguing in favour of his  “Stocks for the Long Run” thesis, which has been challenged in recent times as a result of the ‘lost decade’ in equity markets.

Here is an excerpt:

A look at history shows that the recent experience is not uncommon and excellent returns are available to those who survive rough patches. Since 1871, the three worst 10-year returns for stocks have ended in the years 1920, 1974 and 1978.

These were followed, respectively, by real, after-inflation stock returns of more than 8 per cent, 13 per cent, and 9 per cent over the next 10 years.

In fact for the 13 10-year periods of negative returns stocks have suffered since 1871, the next 10 years gave investors real returns that averaged more than 10 per cent per year. This return has far exceeded the average 6.66 per cent real return in all 10-year periods, and is twice the return offered by long-term government bonds.

Strong future returns also followed poor returns if one extends the analysis to the worst-performing of all 127 10-year stretches since 1871. Without exception, for each 10-year return that fell in the bottom quartile, the following 10-year period yielded positive real returns and the median return exceeded the long-run average.

Stocks also swamp the returns on fixed-income assets over the long run. Even with the recent bear market factored in, stocks have always done better than Treasury bonds over every 30-year period since 1871. And over 20-year periods, stocks bested Treasuries in all but about 5 per cent of the cases.

Read the whole article here.

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Charlie Munger: Man on the Money with Buffett

Friday, July 17th, 2009

Charlie Munger has always been described simply as Warren Buffett’s business partner. Buffett however is the son of several investing fathers, mentors, according to a profile/interview with Munger in FT. This enlightening interview sheds light on perhaps the most successful business partnership in history. Here is an excerpt:

Over the years, generations of investors, chief executives and journalists have wondered why Mr Munger has stayed happily in the background for almost half a century as Mr Buffett forged a reputation as the world’s greatest stock-picker.

“Warren is peculiar, and I’m peculiar,” says Mr Munger, who is also Berkshire’s vice-chairman. “We’ve got our own peculiar operating model. Nobody else operates the same way or stays in the game in a major corporation as long as we have, so we’ve got a different model. And we like it that way.”

Working 1,500 miles apart – Mr Buffett remains in his hometown of Omaha, Nebraska – the two “intellectual pals” have built up a stellar record by sticking to the basic principles of value investing: they buy companies in industries they understand, with managers they trust, at cut-rate prices. “We think all intelligent investing is value investing,” he says. “What the hell could it be if it wasn’t value?”

While Mr Buffett’s mentor, the economist Benjamin Graham, is considered the father of value investing, it is Mr Munger who is credited with helping Mr Buffett evolve beyond buying stocks for no other reason than that they were cheap.

Read the complete article here.






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Jeremy Siegel: “The Market Will Stage a Comeback”

Tuesday, July 14th, 2009

Jeremy Siegel, Wharton School prof and Director of Wisdom Tree ETFs, says “Now that it’s clear the recession will not turn into a depression, stocks are poised for a recovery.” Siegel recently was the subject of an interview conducted by Knowledge@Wharton. You may listen by clicking the player below, or read the edited transcript of the interview below.

Click Play to Listen:

http://knowledge.wharton.upenn.edu/audio/KW_Siegel20090624.mp3

Here is an excerpt:

Knowledge@Wharton: The market just had its first weekly [decline] in a number of weeks. What was driving that?

Siegel: I think there are two principal concerns in the market. One is the rising commodity prices — particularly energy prices and oil. And the other is the rising interest rates, which are in turn caused by fears of huge deficits, as well as rising commodity prices. My feeling is, the market would have been up last week, too, if it didn’t have to contend with those. And now, it’s concerned that those [factors] might push the economy down. Today [June 22], we had a decline in energy prices and in the market. But … energy prices and interest rates [are] our main concerns.

Knowledge@Wharton: Are the energy prices being driven by demand?

Siegel: Demand in China is rebounding very rapidly, although there are some experts who say that there’s still a lot of speculation in it, and that the price … has run a little bit ahead of itself. But China and India are recovering quickly. There are a record number of applications for new cars in China, and those generally use gasoline and oil. So, looking forward, over the next couple of years, those bulls in oil are saying there’s going to be a big increase in [consumption].

Knowledge@Wharton: Doesn’t the rise in demand [indicate] an improving economy overall?

Siegel: Certainly … a good part of the rebound in oil and in interest rates is because the depression scenario has basically been taken off the record. It’s now considered an extraordinarily low probability. So, we’re dealing with a severe recession, and [the question of] how fast we are going to improve from that. And once you’re into that mode, you don’t accept 2% to 3% bond rates any more, and oil won’t stay down at $35 a barrel. But I think some of [the movement has occurred] in anticipation of strong demand from China, particularly for oil, and, on the bond side, from the huge deficits, trillion-dollar-plus deficits that are going to cascade down on the market.

You may read the whole transcript here.

Source: Jeremy Siegel: ‘The Market Will Stage Another Recovery’, Knowledge@Wharton, June 24, 2009

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