Daily Dose of Optimism

Google Video: Warren Buffett at the University of Florida

I came across this great video of Warren Buffett speaking to MBA students at the University of Florida. The entire video is about 1 hour and 30 minutes long, but I highly recommend it, particularly if you have never actually seen or heard Buffett speak. Having read many of his letters in the past, I was interested to see Buffett animate the same material in person.

Many of the questions address the 1998 implosion of Long Term Capital Management and the crash in emerging Asian markets, so I assume that the video was filmed around then. I don't know that Buffett is as spry today as he was in this video, but I was nonetheless impressed by his enthusiasm and energy. Now, it could be my imagination, but I also sensed a great deal of nervousness. For a $40 billion man, he is remarkably human and self-effacing; there are those who have achieved far less, but are far more comfortable with blustery self-promotion (yes, I'm thinking Trump.)

So, let me focus on what I found to be an overlooked but inspirational excerpt (begins at 55:20 of the video):

Q: What's the benefit of being an out-of-towner, as opposed to being on Wall Street?

A: I worked on Wall Street for a couple of years...and I've got my best friends actually, on both coasts, and I get ideas when I go there...but the best way to think about investments is to be in a room with no one else and just think. And if that doesn't work, nothing else will. 

I have been sensing for quite some time now that the prerequisite for me taking my investing game to the next level is basically spelled out above. In that spirit, I find this an inspiring reminder to remain focused on my objectives. - Ed

A Student's Guide to Startups

If you've ever thought about starting your own business, these excerpts from a recent Paul Graham essay are particularly inspiring. - Ed

Link: A Student's Guide to Startups

As well as preventing you from being intimidated, ignorance can sometimes help you discover new ideas.  Steve Wozniak put this very strongly:

All the best things that I did at Apple came from (a) not having   money and (b) not having done it before, ever. Every single thing   that we came out with that was really great, I'd never once done   that thing in my life.

When you know nothing, you have to reinvent stuff for yourself, and if you're smart your reinventions may be better than what preceded them.  This is especially true in fields where the rules change. ... Who knows what obsolete assumptions are embedded in the conventional wisdom? ... Someone ignorant but smart will come along and reinvent everything, and in the process simply fail to reproduce certain existing ideas.

[...]

Even more important than living cheaply, is thinking cheaply. One reason the Apple II was so popular was that it was cheap. The computer itself was cheap, and it used cheap, off-the-shelf peripherals like a cassette tape recorder for data storage and a TV as a monitor. And you know why?  Because Woz designed this computer for himself, and he couldn't afford anything more.

We benefitted from the same phenomenon at Viaweb.  Our prices were daringly low for the time.  The most expensive level of service was $300 a month, which was an order of magnitude below the norm.  In retrospect this was a smart move, but we didn't do it because we were smart.  $300 a month seemed like a lot of money to us.  Like Apple, we created something inexpensive, and therefore popular, simply because we were poor.

A lot of startups have that form: someone comes along and makes something for a tenth or a hundredth of what it used to cost, and the existing players can't follow because they don't even want to think about a world in which that's possible.  Traditional long distance carriers, for example, didn't even want to think about VoIP.  (It was coming, all the same.)  Being poor helps in this game, because your own personal bias points in the same direction technology evolves in.

[...]
One of the things employers expect from someone with "work experience" is the elimination of the flake reflex—the ability to get things done, with no excuses.

The other thing you get from work experience is an understanding of what work is, and in particular, how intrinsically horrible it is. Fundamentally the equation is a brutal one: you have to spend most of your waking hours doing stuff someone else wants, or starve. There are a few places where the work is so interesting that this is concealed, because what other people want done happens to coincide with what you want to work on.  But you only have to imagine what would happen if they diverged to see the underlying reality.

[...]

So the most important advantage 24 year old founders have over 20 year old founders is that they know what they're trying to avoid. To the average undergrad the idea of getting rich translates into buying Ferraris, or being admired.  To someone who has learned from experience about the relationship between money and work, it translates to something way more important: it means you get to opt out of the brutal equation that governs the lives of 99.9% of people. Getting rich means you can stop treading water.

Someone who gets this will work much harder at making a startup succeed—with the proverbial energy of a drowning man, in fact. But understanding the relationship between money and work also changes the way you work.  You don't get money just for working, but for doing things other people want. 

Ken Fisher's Latest Column

Ken Fisher's latest column is up at Forbes.com. If you hurry, you can read it for free (registration required) at Forbes.com before they add it to the $5 archive. In this month's edition, Ken calls Congress for the Republicans, and has some interesting stock picks, two of which I have selected below. - Ed

Link: Fear Will Fade - Forbes.com.

Readers didn't much believe me last month when I said the Republicans wouldn't lose Congress in November. If I'm right and these skeptics are wrong, fears of a big political fallout will fade--which is bullish--and you should buy now before the fear fades. No surprise that readers have this view, since the media are close to unanimous in decreeing that the probability of a Democratic victory is high.

[...]

Germany's  SGL Carbon (6, SGG)  has fallen 33% since May and has yet to recover as it supplies primarily the hard-hit steel and semiconductor industries with carbon and graphite products, which include electrodes, laboratory components and furnace linings. If the economy doesn't roll over, SGL Carbon is too strong not to bounce back. It sells at 80% of sales and 15 times 2007 earnings. 

The Chinese stock market fell in 2003, 2004 and 2005.  China Netcom Group (36, CN) didn't suffer that fate and in fact was in public hands only for the third of those years. Still, in that backdrop you can buy it at only one times revenue, seven times trailing earnings and three times cash flow (in the sense of net income plus depreciation).

With $10 billion in revenue and 120 million voice customers and 13 million broadband customers in ten northern provinces, it is one of China's biggest telecom firms and will move up smartly when the Chinese market recovers.

Jim Rogers Moving to China

For those of you who attempt to divine trends by watching what better informed and more successful people than you are doing (as opposed to merely saying), I have an interesting data point for you, and yes, this item is from today (Tuesday), so I should get a little credit for giving you something on time, as opposed to months after the fact:

II.com: Rogers Going Where The Action May Be

Apparently Jim Rogers, who back in 1970s co-founded hedge fund Quantum with George Soros, is leaping into Asia, just as he said he would in March. Rogers, who is also an author of several books, including Investment Biker, reportedly is putting his New York townhouse up for sale and moving to Asia. He bought his not-so-humble six-story digs for $107,000 29-years ago and is asking $15 million. The house has a greenhouse, gym, wine cellar and a view of the Hudson River to die for.

Rogers, according to Bloomberg News, is giving it all up to relocate to the Far East because he expects a boom soon in Chinese stocks. Rogers reportedly is not sure yet where he and his family will settle, but he told Bloomberg News he’s looking for a “Chinese-speaking city” since his child is bilingual in Mandarin and English.

Not mentioned in the Bloomberg article was Rogers' likely desire to avoid rabid Rogers International Raw Materials Fund investors, but that would be some irresponsible speculation!

So there you have it: Rogers says now is the time to start looking at Chinese stocks. Interesting. When I know more about this, I will make sure to position my portfolio accordingly and then write about it for you to copy. (Just kidding).

Rogers' last major accomplishment was the performance of his commodity index, as well as the timeliness of his call (basically, at a 25 year absolute bottom in commodities). The index he designed and launched in 1998 is up 263% since inception (follow link for details).

(Note: I am talking about his INDEX and not his FUND, so if you have issues with the fund, which I understand, we can talk later...)

Also, if you consider yourself a serious investor, but have not read Hot Commodities, or don't already know the price of a bushel of corn, then buy it and read it today. You can thank me later. - Ed

Ed's Choice Quotes for Sunday 7/16/06

This quote is as applicable to investing as it is to business:

• "The secret of business is to know something that nobody else knows." - Aristotle Onassis

Frustrated by politics in the workplace...or Washington? Just remember:

• "It's cronyism when it's not your friends." - Ed

A good one from Jim Rogers:

• "Certainty doesn't exist in the smart investor's world."

And, as a guiding principal for foriegn policy:

• "Excessive partiality for one foreign nation, and excessive dislike of another, cause those whom they actuate to see danger only on one side, and serve to veil and even second the arts of influence on the other. Real patriots, who may resist the intrigues of the [favored nation], are liable to become suspected and odious; while its tools and dupes usurp the applause and confidence of the people, to surrender their interests. The great rule of conduct for us, in regard to foreign nations, is, in extending our commercial relations, to have with them as little political connection as possible." - George Washington

Daily Reckoning on Buffett's Charity

I thought this was a nice encapsulation of Buffett's folly:

People occasionally appreciate the truth in the same way they appreciate a good joke. It breaks the monotony. But it is to falsehood that they look to organize their lives. Myths stick to them like burrs to a sweater.

For example: Warren Buffett is giving away his fortune because he doesn’t want to corrupt his own children with too much wealth. “I have given them enough so they can do anything,” he says, “but not enough so they can do nothing.” The Sage of the Plains also strongly supports death duties, because he believes it is better for babes to start out life like worker bees - each one an exact duplicate of the other.

But they don’t even start out equal. Not in America. Not anywhere. Warren Buffett was born into the most privileged ranks of American society - the son of a U.S. congressman. Not everyone is so lucky. Of course, not every scion of a political family makes good. And few make as good as Buffett.

But the man from Omaha can’t exactly claim that he started life on an equal footing with the average man, most of whom never get close enough to a congressman to shoot him, let alone have dinner with him every night.

For some prior thoughts of mine on Buffet's social theorizing, I'd refer you to an earlier post:

Questionable PC Pablum Item #1: Buffett Would Not Have Survived 2,000 Years Ago. Well, there were money changers and tax men in the Bible, and no doubt Mr. Buffett's talents would have been useful there. Perhaps he means 30,000 years ago, but I'm sure he'd be there happily perched in the top of a tree, thinking what fools people are to try and fight tigers and bears when trees were safer, plus they had all this great fruit. This self-effacement is probably a defense against the reciprocal - that Buffet might have some inherited advantages, and keeps him palatable for wide consumption. [...]

Questionable PC Pablum Item #2: Life Outcomes are Luck; Governments are Good at Adjusting for that. Buffett espouses a way of thinking that says in order to understand a society's fairness, you have to imagine life outcomes as the result of a "cosmic lottery" where we all draw tickets that determine what advantages we receive. As a theoretical tool, it isn't bad when you try to explain why the legal system has to be fair, but applied more broadly, it discounts the effect of intelligent observation and lots of action in pursuit of positive outcomes.  For a man who is happy to call people "fools" all day long based on folksy common sense, it seems strange that he would result to the equivalent of "efficient markets theory" to explain social outcomes.

Three Takes on Becoming a Great Investor

#1: Michael Mauboussin (Legg Mason)

Fortune: What's the key to successful investing?

Mauboussin: The first thing is to focus your investment process - a good process leads to a good outcome. The second thing is that you want to have some sort of edge - you want to have the odds in your favor [... which typically occurs] when expectations built into the stock are too negative or too positive.

#2: Glenn Greenberg (Chieftan Capital):

Three activities were viewed as irrelevant to investment results and were largely distractions:

1. Speaking with clients - written communications would only be twice per year;
2. Entertaining investment ideas from Wall Street analysts; and
3. Marketing their fund.

All clients would be invested in the same portfolio, and all their personal money would be invested alongside their clients.

Lastly, if they lacked the confidence to put 5% of the fund in a company, they would not buy any. [...]

Greenberg's investing style and approach to his career are patience-intensive. He waits for 2-3 investment opportunities per year, and spent many years learning about investing from others before starting his own firm.

Greenberg communicated his message clearly: "Don't be impatient. Try and find some place to learn where you are not on the tip of the spear. It will help you gain confidence and prevents you from blowing up. [...] If you want to be popular, look for a different line of work."

#3: Warren Buffett

"It is important to know and stick to your circles of competence and pass on things that don't fit squarely in your areas of expertise. My desk has three boxes, IN, OUT, and TOO HARD. We put a lot of stuff in the TOO HARD basket.

You have to segregate businesses you can understand and reasonably predict from those you don't understand and can't reasonably predict. An example is chewing gum versus software.

You also have to recognize what you can and can not know. Put everything you can't understand or that is difficult to predict in one pile. That is the "too hard" pile.

Once you know the other pile, then it is important to read a lot, read about the industries, get background information, etc. on the companies in those piles. Read a lot of 10Ks and Qs, etc. Read about the competitors. [...]

You can increase your sources of investment ideas by widening your circle of competence. I've widened my circle over the years. I only needed to understand insurance in 1951. There were enough opportunities in that sector alone."

Ed's takeaways:

• If you aren't sure what to do with your investments right now, focus on refining your process;
• Approach the market with your own set of criteria, and don't let yourself be distracted by noise;
• At an early stage in your investment career, focus on learning and developing best practices - no point in taking on more risk than you are ready for;
• Accept that you can't know everything, and focus first on companies you understand. You can broaden the range of businesses you understand over time.

Donald Trump & Robert Kiyosaki: Leaders of the American Cargo Cult

Excerpt from the Principles of the American Cargo Cult:

You can succeed by emulating the purported behavior of successful people: To enjoy the success of another, just mimic the rituals he claims to follow.

Here's a preview from an upcoming DDO post:

It's funny how once a someone succeeds - a person, a country - they tend to forget the ingredients of their own success.

It's sort of like listening to Donald Trump tell us that he succeeded as a developer because of "hard work," and not that his Dad's reputation, money and contacts allowed him to do deals that he would never have otherwise been allowed within 100 miles of. It does no one a favor to repeat such lies - not The Donald, who's likely to enter into yet another cockamamie business scheme driven by his inflated "self-made" ego, nor those listening to him, who will be lulled into complacency about the power of contacts for success in the business world.

Nonetheless: I now bring you a seminal event in financial publishing depravity:

Donald Trump, author of the best-selling "Think Like a Billionaire," is teaming up with "Rich Dad, Poor Dad" author Robert Kiyosaki to self-publish a financial advice book expected to hit stores in October.

The title of the new effort, which has been evolving almost daily, is now expected to be: "Why We Want to Make You Rich," with the subtitle, "Two Men, One Message."

This is why you read the NY Post. Who else breaks this kind of news? Surprisingly, this passage from the article actually rings of some truth:

"You can only choose between rich and poor," Kiyosaki told Media Ink. "The middle class is gone."

I would say "in danger of going," not "gone," but perhaps that's a distinction without difference. I also liked this bit:

Trump, a real estate deal-maker and star of "The Apprentice" on NBC, has also had a run of No. 1 best-selling books for Random House, including "Think Like a Billionaire"

Think like a billionaire - a subject Trump knows a lot about. If you can't actually be a billionaire, the next best thing is deluding yourself, right? - Ed

For my prior ramblings on Trump, see here.
For my prior citation on Kiyosaki's Rich Dad, Poor Dad, see here. - Ed

Larry Flynt on Trusting your Gut

"Once I began following my own instincts, sales took off and I became a millionaire. And that, I think, is a key secret to every person's success: Trust your gut."

- Larry Flynt

Evaluating the Performance of Market Pundits - Jim Cramer

I posted earlier this week how CXO Advisory has reviewed the performance of popular market pundit's advice. I gave you a smattering of pundits earlier, now for one we all know and love - Jim Cramer.

Jim Cramer's New York Metro Weekly Column: In summary, Mr. Cramer's stock market calls since  May 2000 have low consistency and approximately coin-flip accuracy. He seems more an entertaining stream of uncalibrated opinion than a stock market maven. Link

Cramer's Mad Money Comments on Viewer Stocks: While samples of 65 and 43 provide some confidence, our conclusions are not statistically bulletproof. ... We may revisit Mr. Cramer's assessments of viewer-proposed stocks for larger samples... [At this point ...] Jim Cramer's assessments of viewer-proposed stocks probably have no economic value. His typical viewer would be better off in a broad index fund.  Link

Yowzer. (Or should I say...boo-yah?) - Ed