Warren Buffett's favorite indicator?

http://www.bloombergview.com/articles/2014-02-26/even-warren-buffett-can-be-wrong-ritholtz-chart

"Ron Griess, who runs the Chart Store, has been looking at charts for more than 40 years. He makes the observation: “There are no bad indicators. There ARE bad interpretations of indicators. I place the Market Cap/GDP indicator in the class of indicators that is often interpreted poorly.”

Buffett have been preaching that macro forecasting is useless.  These indicators might be interesting to look at, I doubt he'd ever use them to make invest decisions.

The Single-Best Metric: EV/EBITDA

The Single-Best Metric: EV/EBITDA

Buffett's annual letter: What you can learn from my real estate investments

http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

"I tell these tales to illustrate certain fundamentals of investing:

• You don't need to be an expert in order to achieve satisfactory investment returns. But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick "no."
• Focus on the future productivity of the asset you are considering. If you don't feel comfortable making a rough estimate of the asset's future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn't necessary; you only need to understand the actions you undertake.
• If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
• With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field -- not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
• Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: "You don't know how easy this game is until you get into that broadcasting booth.")

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following -- 1987 and 1994 -- was of no importance to me in determining the success of those investments. I can't remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU."

Note also that Buffett made the purchases in both cases AFTER the burst of the asset bubbles.

Investor's DNA

The ABCs of Investors’ DNA

"In a speech at Babson College in 2010, the renowned value investor Seth Klarman remarked that research on fruit flies showed that most of them will swarm toward a light—but that a small minority appear to be genetically programmed to stay away from it.

Mr. Klarman, president of the Boston-based Baupost Group, which manages $26 billion in hedge-fund assets, jokingly called these flies “tiny contrarians,” the insect equivalents of “deep value investors.”

He went on to speculate that most people might possess “a dominant gene” for chasing hot performance and overhyped assets, while only a minority have “the recessive value gene” that confers a patient preference for whatever is battered and unpopular.

Mr. Klarman told me this past week that he still holds the same view."

Painting By Numbers - An Ode To Quant
The superiority of models over human judgement.

It is in the gene

Your ancestor, Your fate

 "...Across all of them, rare or distinctive surnames associated with elite families many generations ago are still disproportionately represented among today’s elites.

Does this imply that individuals have no control over their life outcomes? No. In modern meritocratic societies, success still depends on individual effort. Our findings suggest, however, that the compulsion to strive, the talent to prosper and the ability to overcome failure are strongly inherited. We can’t know for certain what the mechanism of that inheritance is, though we know that genetics plays a surprisingly strong role. Alternative explanations that are in vogue — cultural traits, family economic resources, social networks — don’t hold up to scrutiny."

How to make money from the stock market?

"Buy Right, Sit Tight"
- Jesse Livermore

More nuggets of wisdom from one of the all time great stock market traders.  More here:
http://www.ritholtz.com/blog/2014/02/nine-surprising-things-jesse-livermore-said/

In order to buy right, one of course has to be able to value an investment objectively.  Here is a musing from valuation guru Aswath Damodaran:
Facebook buys Whatsapp for $19 billion: Value and Pricing Perspectives

Again, even one can get valuation right, it is still the mental framework and temperament to "Sit tight" that  makes money for the investor.

“It was never my thinking that made the big money for me, it always was sitting.”

Some food for thought! Happy Friday!

Morning Reads

1. MEAN REVERSION: THE MISUNDERSTOOD “MYSTERY METHOD” BEHIND BIG MARKET BLUNDERS

2. Einhorn Says Don’t Be Fooled as Companies Beat Estimates

3. Facebook Values WhatsApp Like Miracle Drug: Real M&A: $19 billion buyout.

4. Remember George Goodman, aka, "Adam Smith" of the Money Game. http://blogs.wsj.com/totalreturn/2014/02/17/remembering-adam-smith/

"If you are not automatically applying a mechanical formula, then you are operating in this area of intuition, and if you are going to operate with intuition – or judgment – then it follows that the first thing you have to know is yourself. You are — face it — a bunch of emotions, prejudices, and twitches, and this is all very well as long as you know it…. A series of market decisions does add up, believe it or not, to a kind of personality portrait. It is, in one small way, a method of finding out who you are, but it can be very expensive. That is one of the cryptograms which are my own, and this is the first Irregular Rule: If you don’t know who you are, this is an expensive place to find out.

- The Money Game (1968 edition, p. 26)"

Take the long view

Morning read:
1. Money management lesson from a mountain climber:
http://www.nytimes.com/2014/02/18/your-money/money-lessons-from-where-the-air-is-thinner.html?ref=business&_r=0

2. Advanced Beta  - this is the way to go.
http://www.ssga.com/library/resh/674831_Beyond_Active_and_Passive_Advanced_Beta_Comes_of_AgeCCRI1391091364.pdf

3. Nobody can predict the twist and turns of any market consistently, but over the long term equity market surely outpaces inflation.  So take the long view is paramount.
http://www.ritholtz.com/blog/2014/02/seeing-the-big-picture/

Investing Wisdom

Here are a few gems form morning readings:

1. The biggest risk is not taking the risk at all.
    "It is one thing to be aware of the potential for terrible things to happen, it is quite another to give up on life      and opportunity altogether." http://www.ritholtz.com/blog/2014/02/everything-you-need-to-know-about-stock-market-crashes/

2. Go for the long term because successful investing is a lifetime pursuit
   "After seeing these charts and this evidence of futility, you might be asking yourself the following: If anyone can win and anyone can lose at any time in the markets, why bother trying at all?

Fair question. But I submit to you that successful investing is a lifetime pursuit, and in the end, it’s the pursuit itself that offers the rewards along the way. The destination was never the thing – most of us aren’t meant to end up as Peter Lynch or Warren Buffett. No, it was what you learned on the way there that made all the difference. As the poet C.P. Cavafy reminds us:

Ithaka gave you the marvelous journey.
Without her you would not have set out.

A lifetime of outperforming the markets is unattainable for most. But a lifetime of self-improvement and the acquisition of skill and knowledge – that’s available for anyone who’s willing to go for it."

http://www.thereformedbroker.com/2014/02/17/the-best-and-worst-thing-about-investing/

3. Neither efficient market nor irrational behavior:  rational response to risk can create market inefficiency:

http://politicalcalculations.blogspot.com/2014/02/a-rational-and-inefficient-noise-event.html#.UwN8XdxJNwg

Tame truth of Wall Street

"...Speculating without any concern about being held accountable is exactly what the army of Wall Street bankers and traders will continue to do. Regardless of the fact that this very behavior was a key cause of the recent financial mess, that is what they are still being rewarded to do. Wall Streeters like to extol the complexity of their work, but in reality, it’s that simple.

The Dodd-Frank Act, the Volcker Rule, the increased capital requirements and the rest have done next to nothing to change the fundamental fact that bankers and traders are still being rewarded to take imprudent risks with other people’s money in order to get big bonuses. That’s the Wall Street reality. The rest is just entertainment.

"http://www.nytimes.com/2014/02/16/opinion/sunday/the-tame-truth-about-the-wolves-of-wall-street.html?hp&rref=opinion&_r=0

Keynes, the investor

http://www.nytimes.com/2014/02/11/your-money/john-maynard-keyness-own-portfolio-not-too-dismal.html?smid=tw-share&_r=1

"In addition to focusing on bargain-priced small and midsize stocks, Keynes carefully evaluated managements. Could they prosper long term? Did they have a plan for when the economy turned around? “I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes,” Keynes wrote in 1934.

Shades of Benjamin Graham and Warren Buffett, and the whole school of value investing. Keynes also loved dividend payers, some of which were paying up to 6 percent during the deflationary 1930s. His portfolios were full of old-line companies in mining, railroads and shipping. Although they were perhaps boring and suspect choices at the time, he bought more shares when they became cheaper and predicted they would be worth more when the general economy recovered.

Ultimately, Keynes was vindicated, building wealth for all of his institutional clients, and he built a personal fortune worth more than $30 million in 2013 dollars at the time of his death, which did not include a tally of his extensive collection of artwork and rare manuscripts. Keynes was not only an investment innovator, but one of the richest economists ever."

Leaving Science by Leon Avery

Tenure is not what it used to be - even professors are quitting. Good for him - it is never too old to try something new.
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Leaving Science

February 8, 2014

Why I’m leaving

I have decided, after 40 years as a lab scientist and 24 years running my
own lab, to shut it down and leave. I write this to explain why, for those
of my friends and colleagues who’d like to know. The short answer is that I’m tired of being a professor. Indeed, I know that I can’t continue  indefinitely, and I would much rather have people ask why I am leaving so soon, than why I haven’t already gone[1]. The long answer follows. It’s
not 100% true, but it’s as close as any explanation of a complex personal  decision is likely to get. It comes down to four things. One has been a constant, the others have gotten gradually worse.

Being a boss

I have never liked being a boss. My happiest years as a scientist were when
I was a student and then a postdoc. I knew I wouldn’t like running a lab,
and I didn’t like it. This has always been true.

Paperwork and bureaucracy

This sounds trivial, but it isn’t. There is a mind-numbing amount of
paperwork and bureaucratic form and procedure involved in being a professor
and running a lab. It was not always so. Every year new requirements are
added, and they have accumulated to the point that most of us just lose
track. They take up an enormous amount of time, and it’s particularly
galling, because we know that most is useless.

Selling yourself

As a scientist, you have to constantly sell yourself. This comes in three
main areas: recruiting people to your lab, publishing your work, and
securing funding. Publishing and funding have gotten harder over my years in
science. Referees and editors are more demanding—publishing a paper is now
always a struggle. Research in biology is expensive, and funding has gotten
tighter and tighter.

There’s also a personal element to this. In the USA, most funding for
biology comes from the National Institutes of Health. For many years NIH was
interested in funding basic research as well as research aimed directly at
curing diseases. With the tightening funding has come a focus on so-called
“translational research”. Now when we apply for funding we have to explain
what diseases our work is going to cure. Publication and recruiting have
followed: journals and students want research on major medical problems.

I have never been interested in that. Undoubtedly it is a noble thing to
help humanity, but it isn’t what makes me tick. I have always been a pure
curiosity-driven scientist. It’s my play and my passion and my religion.
And I’ve been lucky that the world was willing to pay me to do it. Now it
is hard for me to explain the diseases my work will cure. It feels like
selling snake oil. I don’t want to do it any more.

Doubt of the mission

I have come to doubt that we who run research labs are doing a good thing
for our grad students and postdocs. This is also something that has changed.
Grad students and postdocs work hard and don’t get paid much. I did myself
, and I loved it. It’s worth it if you have a future. When I was a student,
and when I was a postdoc and for the first years that I was a professor,
grad students and postdocs had somewhere to go. Now, for most of them, there
isn’t.

But I had a great time!

This all sounds pretty bad, but that’s not how I feel. I love doing science
, and have always felt that I was fantastically lucky that the world was
willing to pay me a salary, and even more to pay for all the expensive toys
I needed, just so I could play. Of course, the world didn’t do this out of
generosity—it was wise enough or gullible enough to think it would get
value for money, and I hope it did. But that doesn’t erase the gift I
received. If the world felt that a renegotiation of the deal was in order,
that’s fair. It was all above board and I always had the option of signing
off.

So now I am. After more than 40 years, I am going to cease to be a lab rat.
There are other things I love, and I expect to continue to learn and work
hard and have fun. My immediate plans are to go back to school and get a
degree in Mathematics. This too has been a passion of mine ever since high-
school sophomore Geometry, when I first learned what math is really about.
And my love of it has increased in recent years as I have learned more. It
will be tremendous fun to go back and learn those things that I didn’t have
the time or the money to study as an undergrad.

A few details: I plan to continue in my present position through the end of
2014. That will give me time to finish up half a dozen papers. I will let my
current grants lapse. I recently applied for a grant on behalf of my
postdoc Alex, and if that is funded, I will stay on past 2014 so that he can
accept it.

[1]I would much rather have men ask why I have no statue, than why I have
one.

          —Cato

Rich Man, Poor Man

RICH MAN, POOR MAN: 

"In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE MARKETS. I can't begin to tell you what a difference that makes, both in one's mental attitude and in the way one actually handles one's money.

The wealthy investor doesn't need the markets, because he already has all the income he needs. He has money coming in via bonds, T-bills, money market funds, stocks and real estate. In other words, the wealthy investor never feels pressured  to "make money" in the market.

The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the "give away" table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great  values are.

And if no outstanding values are available, the wealthy investors waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn't mind waiting months or even years for his next investment (they call that patience).

But what about the little guy? This fellow always feels pressured to "make money." And in return he's always pressuring the market to "do something" for him. But sadly, the market isn't interested. When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he's spending 20 bucks a week on lottery tickets, or he's "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).

And because the little guy is trying to force the market to do something for him, he's a guaranteed loser. The little guy doesn't understand values so he constantly overpays. He doesn't comprehend the power of compounding, and he doesn't understand money. He's never heard the adage, "He who understands interest -- earns it. He who doesn't understand interest -- pays it."  The little guy is the typical American, and he's deeply in debt.

The little guy is in hock up to his ears. As a result, he's always sweating -- sweating to make payments on his house, his refrigerator, his car or his lawn mower. He's impatient, and he feels perpetually put upon. He tells himself that he has to make money -- fast. And he dreams of those "big, juicy mega-bucks." In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this "money-nerd" spends his life dashing up the financial down-escalator.

But here's the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he'd have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser."

http://ww1.dowtheoryletters.com/dtlol.nsf/htmlmedia/body_rich_man__poor_man.html

The moral of the essay is be rich in mindset first and then get rich slowly.

Fresh mistakes, every year

Barry Ritholtz is a top financial blogger I follow closely. His column is full of insights, wits and common sense. 

Every year he put out an annual Mea Culpa where he ruthlessly examines himself and shares his mistakes publicly.  For 2013,

http://www.washingtonpost.com/business/my-motto-fresh-mistakes-every-year/2014/02/07/97911d22-8d3e-11e3-95dd-36ff657a4dae_story.html

What was my chief mistake?  It has to be holding too much cash.  Still scared by the 2008 financial crisis after all these years.

However, a food for thought:  the famed investor Seth Klarman is keeping 50% of his portfolio in cash and returned $4 billion to his investor, due to a scarcity of value opportunities:
http://www.valuewalk.com/2014/01/klarman-cash-letters-to-investors-2013/

A nugget of Klarman's wisdom from this article:  he "worries top-down but invests bottom-up".

The bull is live and well

If history is any guide:

http://www.ritholtz.com/blog/2014/02/comparing-generational-lows-1942-1974-2009/