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Warren Buffett: How I Choose The Next Person To Run Berkshire Hathaway

  
Analysis, Education
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“Four years ago, I told you that we needed to add one or more younger investment managers to carry on when Charlie, Lou and I weren’t around. At that time we had multiple outstanding candidates immediately available for my CEO job (as we do now), but we did not have backup in the investment area.

It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.

When Charlie and I met Todd Combs, we knew he fit our requirements. Todd, as was the case with Lou, will be paid a salary plus a contingent payment based on his performance relative to the S&P. We have arrangements in place for deferrals and carryforwards that will prevent see-saw performance being met by undeserved payments. The hedge-fund world has witnessed some terrible behavior by general partners who have received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their limited partners losing back their earlier gains. Sometimes these same general partners thereafter quickly started another fund so that they could immediately participate in future profits without having to overcome their past losses. Investors who put money with such managers should be labeled patsies, not partners. (more…)

Great Expectations

  
  Education
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The best things in life are unexpected – because there were no expectations – ELI KHAMAROV 

Great_expectations

 Legendary trader Roy Longstreet was once asked by Intermarket Magazine, “Why have you succeeded in trading to such a degree and why do most traders fail?”  Roy answered “Many major problems people have in trading are caused by their expectations – of where the market is headed, how much money will they make from this trade, etc. One thing I learned that has helped me: it is wrong for a person to enter any market with any preconceived expectations.” 

He went on to say, “I know that there’s always the possibility that what I don’t want to happen, will happen. The market will not act in accord with my expectations. You have to ask yourself the question, how must you function to survive? The answer is to be able to accept a loss. Not having expectations makes it a little easier to accept a loss. You must realize that losing is part of soul growth, so to speak. It’s necessary. It’s hard to accept, but necessary.” 

This problem of attaching ourselves to an outcome is not exclusive to trading, but is a problem in investing in general. Expectations of higher and higher returns have become commonplace in an environment of lower opportunity to do so. Few people consider the fact that when they invest today, the riskless marketplace pays close to zero.  For example, the one month Treasury Bill pays $40 for a $100,000 investment, and inflation is running around -1.3%, based on the Consumer Price Index.  (more…)

Prospectus for the United States – Would You Invest?

  
Analysis, Economy, Education
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On the other hand, many of us are well-versed at going over a prospectus and Jim Grant of the Interest Rate Observer has put one together for the United States of America as it seeks to raise $16Bn for 30-year Treasury Notes.  According to the prospectus: “The Bonds will mature on April 15, 2040. Interest on the bonds is payable semiannually on April 15 and October 15, beginning October 15, 2010. Before giving effect to the offering of the Bonds and the securities to be issued concurrently,
the United States had approximately $12,500,000,000,000 of indebtedness subject to the statutory debt limitation.” 

CLICK HERE …………To Read complete article

Abu Dhabi Lecture: Short Summary

  
Economy, Education
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He began by explaining why extreme deflation scenarios are extremely unlikely under the Bernanke Fed, comparing the Fed chairman’s commitment to an anti-deflation strategy to Hitler’s Mein Kampf, a book that also clearly stated a policy program in advance but was not widely believed until it was too late.

Likewise Dr Faber believes Mr. Bernanke is committed to printing money and will in any case have very little choice because of entitlements and the US constitution. Thus he could see the S&P 500 dropping back from current levels to say 950 in this autumn but by then Fed monetary policy would be strongly inflationary and bring the market back up.

Dr Faber pointed out that with the US so deep in debt the Fed thinks it cannot allow asset prices to drop below a certain point because that would devastate the balance sheets of the banks with debt deflation. But he thinks in the long run this is just rolling up another crisis for the future that will destroy the US dollar and cause an even bigger financial crisis.

Declaring himself the ‘most pessimistic of forecasters, nobody is more pessimistic than me’ Dr Faber outlined a scenario in which the dollar has to be replaced by another unit after a future inflation, and holders of cash and bonds lose virtually everything in the process.

ALERT :RBI Tax to dry FII Tap ?

  
Analysis, Economy, Education
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taxForeign investors funneled more than $15 billion to Indian equities in 2009, sending stocks up more than 75% and strengthening the rupee . With expected positive growth rates for the year and higher interest rates differentials that favor emerging markets, investors are looking to India as a good place to stash their wealth.

The Reserve Bank of India (RBI) has already taken the necessary precautions to stave off a potential asset bubble forming in India’s stock and real estate markets. India’s officials are welcoming the fund inflows with open arms, but Finance Minister Pranab Mukherjee says monetary tools will be implemented if inflows become disruptive to the economy.

RBI could stem inflows by:

We are expecting very soon by Next month or First week Jan’10

  • Imposing taxes on inflows; this is considered to be the most likely tactic the government would take, especially when it comes to inflows that could lead to a housing bubble
  • Auctioning quotas for foreign credit to increase the cost of raising funds
  • Using market intervention bonds and raising cash reserve ratios

Trading Wisdom – Tom Willis and Bob Jenkins

  
  Education
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Years back Tom Willis (a friend of Richard Dennis’) and Bob Jenkins, running a hedge fund, offered answers about “price” during an interview. An excerpt:
Bob Jenkins: “Everything known is reflected in the price. It makes inherent sense. I could never hope to compete with Cargill that has soybean agents scouring the globe knowing everything there is to know about soybeans and funneling the information up to Lake Minnetonka, their trading headquarters. Unless I have a friend at Cargill, I can only get this information one way: I can infer it technically. We have friends who have made millions trading fundamentally, but their problems are (a) they can rarely know as much as the commercials [i.e. Cargill]; and (b) they are limited to trading their [one market] specialty. They don’t know anything about bonds; they don’t know anything about the currencies. I don’t either, but I’ve made a lot of money trading them. Every picture’s worth a thousand words.”
Tom Willis: “They’re just numbers. Corn is a little different than bonds, but not different enough that I’d have to trade them differently-not different enough that I would have to have a different system.”
Bob Jenkins: “Some of these guys I read about have a different system for each [market]. That’s absurd. We’re trading mob psychology. We’re trading numbers. We’re not trading corn, soybeans or S&Ps.”
I hope everyone catches the nuance of Bob Jenkins’ last statement? Some great succinct language about what “it” takes. Taken from an interview 20 years ago…

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