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Sunday, October 26, 2014

A rare Walter Schloss Interview

Schloss is a Grahmanite through and through and he compiled an outstanding investment record.

Here is the interview:

Walter Schloss:
 "But people have to be very humble about money if they
want to keep it. They have to work at it. It doesn't just happen."

https://www.dropbox.com/s/sxc1er1qktt87ze/Walter%20Schloss%20-%20OID%20Interview.pdf?dl=0Walter Schloss:


Walter Schloss:
 But people have to be very humble about money if they
want to keep it. They have to work at it. It doesn't just happen.
And different children have to be treated differently.


But people have to be very humble about money if they
want to keep it. They have to work at it. It doesn't just happen.
And different children have to be treated differently. Some people are even
afraid of money. My mother, for example, would have been one of the worst
investors and my father was a terrible investor.

Sunday, October 5, 2014

Your brain is the biggest hurdle to overcome for big investment gains

http://www.washingtonpost.com/business/even-if-you-could-pick-huge-winners-could-you-hold-them/2014/10/03/bd426e34-49ba-11e4-891d-713f052086a0_story.html
 Columnist October 4

Let’s imagine for the moment that you are the World’s Greatest Stock Picker. You have an uncanny talent for ferreting out “the next Microsoft” — companies that are on the sharpest edge of what’s next, that are about to undergo tremendous growth. These firms will rule the world: They will be the most powerful, profitable and influential corporate entities known to man.
Even better, your superpower is that you can find these companies when they are tiny, before they have had their explosive growth, when hardly anyone has heard of them. You find and buy these stocks while their prices are still in the single digits. Companies like Apple, Google, Tesla, Netflix and Chipotle that will one day measure their growth in increments of thousands of a percent.
Can you imagine how much wealth you could create?
I have some bad news for you, kiddos: Even if you had that superpower, it would be worth surprisingly little to you. The odds are that it would not create much wealth, and it might even cost you money.
How could that be possible?
The short answer is your brain. The three-pound ball of gray matter sitting atop your spinal cord was never designed to make risk/reward decisions in capital markets. It took about 100,000 years to optimize for its intended purpose: Keeping you alive.
The occasional Darwin Award aside, it does an outstanding job of keeping you safe from all manner of predators on the savanna. That you now live in a condo and enjoy lattes is irrelevant to its functionality. Its job remains keeping you alive long enough for you to procreate, pass your genes along and perpetuate the species.
This dynamic, opportunistic, self-organizing system of systems occasionally runs into trouble when we try to force it to perform other, “off-label” uses. That includes buying and selling pieces of paper that represent tiny slices of companies. As we shall see, that big, under-utilized brain of yours is no help anytime it gets over-stimulated by your emotions.
Which is precisely why being the World’s Greatest Stock Picker is unlikely to be how any of you is going to get rich. Let’s use the shares of five companies as examples: Google, Tesla, Chipotle, Netflix and Apple.
The performance of each since its initial public stock offering has been nothing short of astounding. Since going public, each stock has generated returns of more than 1,000 percent. A $10,000 IPO allocation in any one is now worth at least $100,000.
To give you an idea of just how phenomenal these companies have done, Google is the laggard of the lot. Since its IPO in August 2004, it has gained a mere 1,282 percent. Tesla edged out the boys from Mountain View, Calif., with a gain of 1,352 percent. And they did it in less than four years — Tesla’s IPO was June 2010 — vs. the decade it took Google to gain 1,000 percent.
Those spectacular returns look downright paltry compared with the 2,865 percent gain Chipotle has had since going public in 2006. And Netflix beats that, rising 5,816 percent since 2002.
Then there is Apple. It is a beast unto itself, racking up a mind-boggling 22,288 percent in appreciation since its 1980 debut. It has become world’s biggest company by market capitalization.
Even if you bought large chunks of each of these firms at their IPOs, the odds are that nearly all of these giant gains would have eluded you. Why? As I shall show you, each of these companies would have sent you running for the exits — repeatedly — over the years, screaming as if your hair were on fire.
Don’t believe me? Consider the facts:
• Netflix has lost 25 percent of its value on four separate days. Not over four days; on separate occasions, it lost 25 percent in a single day. In one four-month stretch in 2011, it lost 80 percent of its value. On Netflix’s worst day, it fell 41 percent.
• Chipotle has lost 15 percent in a single day on four occasions. During the 2007-2009 crash, it lost 76 percent of its value — about 50 percent worse than the market overall.
• Tesla went up 400 percent in 6 months, then lost 40 percent over the next 10 weeks. In one month, it lost about 25 percent of its value.
• Google lost nearly 70 percent in the Great Recession. During its worst quarter, its stock price fell more than 36 percent.
• Apple has lost 25 percent or more six times in the past 10 years alone. That was after its meteoric rise. During its worst week, it was cut in half, falling 51 percent. It saw similar damage during its worst month and quarter as well — getting cut in half in each time period.
How often have you invested in a stock, only to get scared out of it when things grew shaky? That’s fairly typical behavior for investors.
Now imagine how you would have behaved if you happened to have a significant part of your net worth tied up in that one holding.
Let’s say a decade ago, you put $15,000 into Apple. You bought 1,000 shares at $15 (with $13 cash) because you thought that newfangled iPod had some potential. Since then, it split two for one and then earlier this year, it split seven for one. You now are holding 14,000 shares of Apple. At the current price of about $100, it is worth $1.4 million dollars. For most people, this is a very high percentage of their net worth. How well do you sleep when 90 percent of your total net worth goes through giant swings?
Apple was worth about the same amount in September 2012 — just before it gave back almost half its value, falling 44 percent. Would you have held on? What about all of those prior 50 percent corrections?
This is not an academic theory. Consider how you have reacted to much more modest drops in your holdings. How often were you shaken out of a stock, only to see it rocket higher after you sold? And somebody was dumping stocks in March 2009; after all, selling climaxes (also known as capitulation) are how bottoms are made.
Some years ago, I recommended to the brokers I worked with to do just that regarding Apple. They bought millions of shares at an average price of $15. At $20 dollars, they were selling it, whooping it up and high-fiving one another. When I asked why they were selling it when my price target was higher ($30!), I was told: “It’s a 33 percent winner — time to ring the bell, Ritholtz!” That was even before any trouble had hit.
How many of you, dear readers, could hold onto a giant winner like these five for the duration? How do you know that any of these are not about to turn into a classic disaster stock? Think about once-giant winners that collapsed: Lehman Brothers, WorldCom, Lucent, JDS Uniphase.
All of these were one-time market heroes; all went bust in spectacular fashion. Your superpower gives you the ability to find the giant winners, but it does not give you the ability to hold onto them, nor does it give you the ability to distinguish between the superstars and the washouts.
As we have discussed previously, this is a feature, not a bug. The good news is your brain has kept you alive long enough to read this column. The bad news, it also made you sell Apple 10,000 percent ago.
The reality is, when it comes to risk/reward decisions, you are just not built for it.


Friday, October 3, 2014

Bill Gross's Farewell letter to PIMCO

http://www.bloombergview.com/articles/2014-10-03/bill-gross-s-investor-outlook-on-palace-coups

Not exactly sure if it is actually written by Bill Gross but it is fun to read.


Bill Gross, founder of Pimco, and its chief investment officer for the past 40 or so years, resigned last week. Rumor has it that he was but two steps ahead of a mutinous gang, swords out, planning to make him walk the plank. Gross was too quick and before the mutineers could force him, he jumped ship -- and landed at Janus Capital. There, we surmise, he was given a slug of equity and a free hand to run a smaller, more nimble fund.
On his way out of Pimco, Gross penned a heartfelt farewell letter to his former colleagues. But so great was his haste that he never hit “send.”
Fortunately for you, dear reader, we managed to get our hands on a copy of that e-mail, which we reproduce below and without further comment:
I can add colours to the chameleon,
Change shapes with Proteus for advantages,
And set the murderous Machiavel to school.
Dear Friends, Colleagues and Co-workers,
For the past 43 years, Pacific Investment Management Co. has been my home, as well as my pride and joy. With great sadness, I must bid her adieu, not because I want to leave, but because I must. It is the natural order of things for all seasons to change; for the next generation must be given its chance. A new epoch is upon us. Ashes to ashes . . . .
All those reasons -- plus truth be told, an imminent palace coup -- meant it was time for me to go.
Before I depart, however, I offer you this final Investment Outlook, my last IO for you to consider. No cats, no "Man in the Mirror," just a few thoughts for you to reflect upon as the next era -- a newer new normal -- begins.
I co-founded PIMCO in 1971, starting with a mere $12 million in assets. Who could have imagined what the company would become during the ensuing 43 years? After four decades as founder, fund manager and mostly as CIO, I guided this firm to managing more than $1.97 trillion in client assets. When I sold the 70 percent stake not held by Pacific Life Insurance Co. to Allianz SE in 2000, the company had a value of $4.7 billion.
Not too shabby a track record. I daresay I must have gotten one or two things right during that period.
Not that you would know it by the recent press coverage, nor by the whispers in the hallways of Pimco. The immense wealth I helped to create for my colleagues, partners and clients over all that time meant nothing, once Machiavelli’s stratagems were put into play.
There is a standard sequence of events for all insurrections, and this one was no different. It included the favored tactics: A public character assassination, the quiet intimations that I had lost it (erratic behavior, dark glasses at a presentation, an elegy to my cat Bob). Add to that a break with a trusted associate, which implied something nefarious about that behavior (How did Mohamed manage to resign from Pimco, yet stay employed at Allianz? I couldn't pull that one off).
These hints and allegations were easy to make, especially given my natural eccentricities. But I put this question to you: Was I so different from any other California billionaire? The TM and yoga, the occasional head stand, a well-deserved bark at a wayward underling -- these and all manner of behavior that no one ever thought about before suddenly took on all sorts of dark implications once the coup was under way. Never underestimate the impact of a whisper campaign.
On ne voit bien qu'avec le cœur. L'essentiel est invisible pour les yeux. Translation: "One sees clearly only with the heart. What is essential is invisible to the eye."
I must point out that these idiosyncrasies have been on display for decades, and were never looked on askance. At least, not while the alpha was piling up and the assets under management were rolling in.
But alas, that chapter has come to an end; it is now time to look forward. The future of Pimco is now in your hands, a dozen or so managing directors. You represent the future of the firm. You are the new BSDs, and to you I put the following questions:
• Some Pimco funds are generating what I call “perceived” alpha. This seems to be nothing more than “leverage-enhanced” beta. Discuss.
• I cautioned against the wholesale expansion into equities, as fixed income was the asset class upon which the firm made its bones, built its reputation and acquired almost all of its AUM.
How is that equity thing going? And whatever happened to thatKashkari kid? Seemed like a nice fellow.
• Many of you seemed to resent my annual compensation (Mohamed's too). I suspect you believed that a few hundred million dollars would be better placed in your collective hands.
Query: Is splitting up the big dogs’ comp among yourselves worth the fallout of a smaller asset base in the years to come? Is that in the best interests of the firm?
• Speaking of assets: Who among you is going to be the firm’s rainmaker? Which of you can raise a trillion dollars? How about a $100 billion? How will you compensate the people who raise that money? Best of luck managing the resentment for whatever compensation system you arrange.
• Many of you are in your 30s, 40s and 50s. How long do you plan to work here, and how much are you willing to sacrifice? I was married to this place, and gave it my all.
What are you prepared to give?
• Now that you have your new-found authority, what are your plans for it?
As for me, I am off to my newer new normal. There will always be a special place in my heart for Pimco. I wish all of you all of the luck in the world, as I leave you in charge of her. She’s your baby now. Try not to screw it up too badly.
William H. Gross
Managing Director, Retired

Monday, September 22, 2014

Investing is a thinking game


I just came across an article I just read that I thought was interesting, and thought certain readers might enjoy. Although the article has nothing directly to do with investing, I think there are some takeaways for those of us in the investment world. Certainly the article has relevance to anyone whose chosen endeavor requires the occasional deep thinking.
The article* is called “Why Walking Helps Us Think”. The article—as you probably guessed from the self-explanatory title—describes the benefit of going for a walk. I’m not sure about all of the studies that it references, but I can say for sure that it is an activity that I believe helps my investment process.

Walking and Productive Thinking

I enjoyed reading the article because I walk just about every day, sometimes for a couple hours at a time. This activity is something that I’ve begun doing more in recent years. My personal exercise routine has evolved since my days as a competitive runner. I still run occasionally, but I find it’s more enjoyable, and—at a more relevant level to this discussion—easier to get what I would call “quality thinking” accomplished. So I do occasionally exercise vigorously, but I think of walking more as an investing activity than I do an exercise activity.
After hours of reading annual reports, making calculations, and spending time thinking in my office, I sometimes find that walking helps me crystallize the work and the thinking that I put in earlier.
Basically, I’ve always felt that investing is a discipline that is most successfully implemented in a quiet environment that promotes thoughts, ruminations, and observations much more than it promotes hustle and activity. I’m a big fan of hard work, and a big fan of those that hustle. But investment is a field where one must diligently work, think, and act, and must resolve oneself that results come later—often years after—that groundwork has been laid.

Buffett, Munger, and Archimedes

Investment results—the fruits of one’s labor—cannot always be pinpointed to a specific episode of work. In other words, a successful investment cannot be credited to one specific activity that you completed earlier. I think it’s much easier for most people to say: “If I do X, then I’ll get Y as a result”. To succeed as an investor takes lots of hard work, yes… but it also takes equal parts patience, discipline, and more specifically, the willingness to work hard now with the expectation that eventually you’ll reap a reward down the road—sometimes years down the road.
Buffett and Munger talk about this frequently. Buffett read the annual report for IBM for 50 years until one day while sitting (and thinking) in his office, he gained an insight on IBM that he hadn’t had previously—and this insight subsequently led to an $11 billion investment by Berkshire in IBM stock. Buffett also said that he came up with the idea to invest in Bank of America using the preferred stock and warrants while sitting in his bathtub.
(Interesting side note: Archimedes didn’t figure out which Greek banks were undervalued while in the tub, but it was the bathtub where he first realized that the volume of his body that was submerged underwater while getting into the bathtub displaced exactly the same volume of water.)
Back to Buffett… Again, Buffett read annual reports for Bank of America and its predecessors for 50 years before finally being able to reap what he sowed all those decades. The work has to get done without a tangible handle on where the reward eventually comes from. And the foundation of that work is often solidified by spending significant amounts of time thinking.
Although I’m not sure if Buffett, Munger, or Archimedes ever spent significant time walking, I think they spent significant time just sitting quietly and thinking—either in the bathtub or elsewhere.

The Importance of Quiet Thinking

Thinking in a quiet atmosphere is virtually unheard of in this day and age. The problem that we have as investors is that this type of behavior is not the typical behavior that’s required for success in virtually every other field. In most fields, urgency, hustle, and activity is often rewarded—and usually rewarded very quickly. Not so in investing. Hard work is absolutely necessary, make no mistake. But you have to be willing to work hard and also accept that the specific result of that work will come at an unknown time and in an unexpected form. That can be too difficult for most people to handle, and I suspect it’s why so many perform poorly in an activity that at its core, is quite simple.
As I’ve said before, I think there are numerous advantages for individuals and smaller investment managers to do very well—much better than the average—if they capitalize on the structural advantages that they have over the larger funds and the majority of the other stock market participants.
Of course, there are the principles of value investing that matter most. And there are certain other requirements such as hard work, skill, and to a much lesser extent, a certain intelligence level—but I think that just as important as hard work (and more important than intelligence) is the ability to do two things: 1) maintain a long term time horizon along with maintaining the discipline and patience required for long term success, and 2) have the ability to slow things down… to spend time thinking.
Have a great weekend. Hopefully you can find time for a walk.