The Ideas Report For Serious Investors

Yale chief investment officer David Swensen, the man credited with making the Yale endowment one of the top-performing large investment funds of the past couple of decades, is not wavering from his long-term strategy of allocating Yale's capital to a wide range of asset classes, including less-traditional assets such as international equity, private equity, commodities and hedge funds.

Swensen is quoted in a new article by U.S. News & World Report.

Read past annual reports by the Yale Investments Office to learn about Yale's approach to asset allocation.

Posted by manualofideas at 01:32 AM | Permalink | Comments (0)

Fascination with short-term investment performance is well documented and almost inescapable. The media does its best to stoke interest in who's up and who's down, usually making it seem like those who are winning have some special insight, while those who are losing are simply not smart enough to grasp the new new thing -- whether it's buying Internet stocks, real estate, commodities or, lately, shorting commodities and buying government bonds.

We can't blame the media. It would be quite boring to read articles about Warren Buffett's track record day in and day out. It's more satisfying to see who's got the "right stuff" at this very minute. Unfortunately, as Nassim Taleb has pointed out in his writings, luck is usually mistaken for skill, and those with a few lucky rolls of the dice get to roll some more.

Which brings us to today's Bloomberg article on who's up and who's down in the hedge fund world. The following paragraph is quite amusing:

"[Pierre] Andurand’s $1.1 billion BlueGold Capital Management LLP hedge fund in London almost tripled between its February debut and November by betting on higher oil prices in the first half of 2008 and then reversing the strategy, the 31-year-old manager said."

Translation: In 1H08, Andurand bet on black, the roulette wheel was spun, and -- he won! In 2H08, Andurand bet on red, the wheel was sent around again, and -- he won again! He must be really good at roulette!

We certainly would love to know how Andurand will bet in 1H09. Well, maybe we'll just give him our money and let him place the chips for us. Whoever said gambling was about the fun of placing a bet?! Isn't it about finding the most skilled gambler and letting him have the fun while we make the money? Yeah, right.

Posted by manualofideas at 02:47 PM | Permalink | Comments (0)

Harvard Business School professor Niall Ferguson discusses his recent book "The Ascent of Money." The interview is a bit slow for our taste but Ferguson makes some interesting points.

Posted by manualofideas at 09:34 PM | Permalink | Comments (0)

Watch Steve Markel and Tom Gayner of Markel Corporation talk about their approach to business and to investing (from Darden Value Investing Conference, November 6, 2008):

Posted by manualofideas at 12:11 AM | Permalink | Comments (0)

Tyler Cowen's New York Times column takes us back to an episode that now seems small and insignificant -- the bailout of Long-Term Capital Management in 1998. While LTCM's equity holders were essentially wiped out, regulators stepped in to protect the fund's creditors, primarily Wall Street investment banks that had lent money recklessly to LTCM and allowed it to operate at huge leverage ratios (as high as 100 to 1)..

It is quite clear now that LTCM should have been allowed to fail, for a number of reasons:

First, regulators would have sent a strong message to Wall Street investment banks that they needed to manage their risk exposures more carefully because they would be responsible for their own mistakes. The lack of a bailout would have resulted in billions of losses for Wall Street banks, but they were strong enough in 1998 to absorb the losses and move on with a black eye and an important lesson. Instead, they learned quite a different, perverse lesson.

Second, the lack of an LTCM bailout would have provided regulators with a real-life experiment, showing them how the failure of a large market player could reverberate through the markets. While this would have been a slightly scary exercise, it is highly unlikely that a straightforward bankruptcy of LTCM would have had anywhere close to the impact on the financial system that the most recent crisis has had. Regulators could have learned from an LTCM bankruptcy and improved their economic tool set. Instead, they walked away with the impression that bailouts could avert any doomsday scenario. That impression has now been shattered.

Finally, LTCM should have been allowed to fail without government involvement because it would have been the right thing to do. We argued in a previous post that capitalism is good at dealing with individual failures, and that government should let those happen. Had LTCM not been bailed out, we may never have crossed the threshold at which excesses became so widespread that they became a systemic problem.

Posted by manualofideas at 12:20 PM | Permalink | Comments (0)

The government appears to be missing a major stimulus opportunity by allowing the spread between 30-year fixed mortgage rates and the yield on 10-year Treasuries to linger at twice the historical spread.

As Paul Krugman points out, since Fannie and Freddie are now even more under the control of the government than they used to be, the Treasury should take action to lower mortgage rates. This could be done through an explicit government guarantee of Fannie and Freddie, but there are other options as well.

Posted by manualofideas at 01:17 AM | Permalink | Comments (1)

Watch a panel including Tom Russo of Gardner, Russo, Gardner and Guy Spier of Aquamarine provide insight into global investing, ranging from global mega caps to small caps (from Darden Value Investing Conference, November 6, 2008):

Posted by manualofideas at 05:49 PM | Permalink | Comments (0)

Watch five panelists discuss where they find value and why under-explored areas of the market are less popular with the average institutional investor.

Posted by manualofideas at 03:34 PM | Permalink | Comments (0)

Hear insights from Alice Schroeder on the traits that make Buffett great, including a case study not included in her book on Buffett:

Posted by manualofideas at 10:51 PM | Permalink | Comments (0)

Peter Schiff of Connecticut-based brokerage firm Euro Pacific Capital sums up the sentiment of many of us:

"What the government is saying with the bailout is, 'be irresponsible, be reckless, and you'll get rewarded; be responsible, and you get punished because you'll have to pay for all the irresponsibility of everyone else."

The question then becomes whether the government should do nothing and let the proverbial chips fall where they may. This is apparently the conclusion of the article in which Schiff is quoted.

While we agree with Schiff, we do not agree that the solution right now is to punish the bad actors for their moral sins. While it may initially feel good to say, "to hell with those who acted irresponsibly," such sentiment, if acted upon, could plunge all of us into another Great Depression.

The question cannot be, "How do we punish the bad actors?" Instead, it has to be, "How do we safeguard the livelihood of those who acted responsibly?" Unfortunately, the answer includes giving a pass to many of those who acted irresponsibly. Why? Because the problem of irresponsible behavior was allowed to become so widespread that it became a systemic issue.

The right course of action is for the government to stop irresponsible behavior before it becomes a systemic issue. The Feds don't need to worry about isolated irresponsibility -- the free market has a good way of punishing such behavior. However, the market is not good at punishing widespread misbehavior.

The system breaks down because when the influence of bad actors becomes too great, they start rewriting the rules of the game. Consider the negative influence of the housing and mortgage industries on Congress and the GSEs. Or consider the influence of banks and investment banks on Congress when it was time to repeal Glass Steagall. Or consider the influence of Enron and other energy companies on Congress when it came to energy deregulation.

While the government cannot and should not replace the free market, it must step in at times to save the market from itself. Unfortunately, when it's time to do so, it's also likely the point of least political will -- because at the peak of excess, the influence over Congress by those perpetrating the excess is also likely to be at a peak. Which is why in a democracy such as ours, you can be quite sure that we will keep going through boom and bust sequences. History may not keep repeating itself, but the future and the past will almost surely keep rhyming.

Posted by manualofideas at 09:09 PM | Permalink | Comments (0)

Some think Buffett lost out to the French on the bidding for Constellation Energy (CEG). Not so fast. Whether the French firm Electricite de France won or lost, we will know for sure in several years. What we already know, however, is that Buffett walked away from the deal a winner -- and it apparently was no accident either.

Read the full article by David Weidner.

Posted by manualofideas at 03:49 PM | Permalink | Comments (0)

Credit markets estimate the probability of Sears Holdings (SHLD) going bankrupt at 26%, according to a December 22nd Credit Suisse research report entitled, “Retail Bankruptcies & Store Closures.” This compares to 18% for Sacks, 18% for Dillard’s, 13% for Macy’s, and 5% for JC Penney. Target, Wal-Mart and Costco are at 1%-2% each.

While Sears’s operating results have clearly deteriorated, pegging a Sears bankruptcy at anywhere north of 5% is unjustified. With Eddie Lampert at the helm, Sears will do whatever it takes to maximize value for shareholders. Lampert would not have increased Sears’s share repurchase authorization by $500 million on December 2nd if he had any liquidity concerns.

This may sound like a broken record by now, but Sears does have immense embedded value in the real estate. Even in the current market, Sears can monetize some of the real estate if necessary – and do so likely well above book value. For the skeptics among you, the following link provides some estimates regarding real estate value at Sears Holdings. Our analysis supports the thesis that the company’s real estate value comfortably exceeds net debt under any reasonable assumption.

The Manual of Ideas Estimate of Value of SHLD Owned Retail Square Footage

Disclaimer: Copyright 2008 by BeyondProxy LLC. BeyondProxy and its affiliates may have positions in and may make purchases or sales of the securities discussed in this report. It is the policy of all Related Persons to allow a full trading day to elapse after the publication of this report before purchases or sales of any securities discussed herein are made. No Related Person held a position in securities discussed in this report as of the date of publication. Use of this report and its content is governed by the Terms of Use described in detail at http://www.manualofideas.com/terms.html.

Posted by manualofideas at 12:00 AM | Permalink | Comments (0)

Watch a panel discussion on the current financial crisis, its implications for investors, for value investing, and for the future of the hedge fund industry (from Darden Value Investing Conference on November 6, 2008):

Posted by manualofideas at 10:57 PM | Permalink | Comments (0)

Don Wilkinson of Wilkinson O'Grady provides historical perspective on the current financial crisis (from Darden Value Investing Conference, November 6, 2008) -- talk starts around 5 minute mark:

Posted by manualofideas at 08:06 AM | Permalink | Comments (0)

The Congressional Budget Office has released two large reports on health care and budgetary issues. Health care investors will find them worth a look.

Conclusions by the CBO include the following:

The rising costs of health care and health insurance pose a serious threat to the future fiscal condition of the U.S.
– Medicare and the federal share of Medicaid are projected to be about 4% of GDP in 2009 and nearly 6% in 2019 and 12% by 2050

A substantial and growing number of non-elderly people are without health insurance:
–At least 45 million in 2009
–About 54 million in 2019

Those problems cannot be solved without making major changes in the financing or provision of health insurance and health care. Policymakers will face difficult trade-offs between two objectives:
–Expanding insurance coverage while
–Controlling both total and federal costs for health care

By themselves, premium subsidies or mandates are insufficient to achieve universal coverage. Near-universal coverage is possible using a combination of approaches, such as:
–Enacting enforceable individual mandates along with subsidies for low-income people
–Creating a voluntary system that combines subsidies that cover a very large share of the costs of insurance with a process that facilitates enrollment (as in Medicare)

There are no simple solutions to address the serious concerns about the efficiency of the health care system:
–Encouraging the purchase of less extensive coverage could reduce treatments of minimal benefit
–Enrollees would face higher cost sharing or tighter management of their care

Other approaches (health IT, preventive care) could improve people’s health, but:
Would bring either modest reductions in health care costs or increases in overall spending in the 10-year budget window (2010-2019)

Significantly reducing the level or growth of health care spending would require substantial changes in the incentives faced by doctors and hospitals to control costs

Access the reports as follows:
Slideshow: Overview of reports released on December 18, 2008
Report 1: Key Issues in Analyzing Major Health Insurance Proposals
Report 2: Budget Options

For an excellent overview of key health care spending issues, view a talk by CBO director Peter Orszag in April 2008. We also recommend checking out materials from a health care conference at Stanford in September 2008.

Posted by manualofideas at 10:05 PM | Permalink | Comments (0)

Popular astrophysicist -- and, apparently, part-time comedian -- Neil DeGrasse Tyson gives an interesting and funny talk on "ways to die" in our universe and elsewhere.

Posted by manualofideas at 12:43 PM | Permalink | Comments (0)

Comedy -- but also perspective -- from Louis C.K.:

Posted by manualofideas at 08:48 PM | Permalink | Comments (0)

WE COULD USE SOME TRAINING ON COMPELLING AD COPY

Sorry if this doesn't sound as enticing as one of those "Double Your Money in 14 Days" advertisements, but we can actually tell you how to double your money in 30 l-o-n-g years. Move in a little closer so we can whisper this special tip in your ear -- BUY THE 30-YEAR U.S. TREASURY BOND!

At a fixed yield to maturity of 2.55%, $1,000 invested in 30-year Treasuries today will grow to all of $2,126 in 2038. Oh, did we mention you will get $2,126 only if you reinvest all of the little interest coupons you receive along the way (so, no shopping sprees along the way either!).

DO YOU REALLY WANT TO SAY "'TILL DEATH DO US PART" TO THE U.S. GOVERNMENT?

Now tell us, would you really give the U.S. government your money today, only to see 2.1 times your money back in 30 years? Do you really think that $2,126 in 2038 will even buy the same amount of stuff $1,000 buys today? We are talking U.S. dollars here, folks, and 30 years should be plenty of time for the government's current binge of monetary stimulus to depress the dollar's purchasing power, if ever so slightly.

Okay, so we agree that no sane person would make a 30-year investment that will grow to only $2,126 for every $1,000 invested today. It's simply not worth the opportunity cost nor the inflation risk.

WELL, I'M NOT BUYING, BUT...

Why then is the 30-year Treasury Bond trading at this ridiculous implied yield of 2.55%? "Easy," you say. "Flight to safety. Everyone wants the safety of Treasuries right now -- at least they're not going to destroy cash." You add, "Besides, buying a 30-year Treasury doesn't mean you are locked in for 30 years. I can always sell the Treasury Bond in the market if I think inflation will rise."

DEBUNKING ILLOGICAL JUSTIFICATIONS

Those are plausible arguments, but they are plain wrong. If a rational person wants safety in Treasuries, she will buy short-term Treasuries. For example, three-month Bills will preserve your cash just fine, and you won't be taking a risk that inflation will erode your principal. For, if inflation suddenly became a concern, your Bills would mature and you could then reinvest the cash in a security that would reflect the market's new-found concern for inflation, thereby inevitably promising you a higher nominal return than your original T-Bill had done.

If, on the other hand, you "parked" your cash in 30-year Treasuries instead of three-month Bills, resurgent inflation concerns could obliterate the value of your principal even in a span as short as three months. This is because whoever takes the 30-year Bond off your hands in the market will demand a much higher interest rate than the current 2.55% for the next 29+ years. Of course, such a demand for a higher yield to maturity would send the price of your 30-year Treasury plummeting. Conclusion: Flight to safety is only possible into short-term Treasuries. Flight into long-term Treasuries is flight to nominal safety and real destruction.

As for the argument that a buyer of a 30-year T-Bond can sell it in the market at any moment and is therefore not actually locked into a 30-year commitment, I believe the previous paragraph debunks this argument as well. Essentially, unless you are suddenly the only one concerned about inflation, you will not be able to escape the 30-year Treasury by selling it in the market without leaving a lot of principal on the table to compensate your buyer for her willingness to take on the risk of accelerating inflation.

STILL NOTHING NEW ON THE WESTERN FRONT...

As specious as the arguments put forth by 30-year Treasury bulls are, they appear to have been widely accepted in today's market. It reminds us of the almost universal acceptance of the hitherto justification of the leveraged buyout and real estate booms: "There is just so much liquidity out there, and as long as there is so much liquidity, these booms will continue. Moreover, there is no apparent catalyst that will remove liquidity from the market." Neither is there an apparent catalyst that will cause the implied yield on the 30-year Treasury to rise from the current 2.55% to a more appropriate high single digit or even low double digit yield. However, history teaches us that by the time a catalyst becomes "apparent," it is apparent to almost everyone, rendering you unable to get out of long-term Treasuries unscathed.

We are not urging you to short long-term Treasuries, though this is precisely what we have done. However, we do ask you to reconsider your participation in what appears to be today's last remaining asset bubble.

Disclosure: Entities affiliated with The Manual of Ideas, its publisher, BeyondProxy LLC, and John Mihaljevic, hold positions in TBT. For full disclosure and terms of use, click here.

Posted by manualofideas at 11:05 PM | Permalink | Comments (1)

This 2005 letter to the SEC by Harry Markopolos gives an incredible glimpse into the behind-the-scenes failure of the SEC to shut down Bernie Madoff despite extremely credible allegations against him.

Posted by manualofideas at 09:40 AM | Permalink | Comments (0)

In a new interview with the Harvard Business School Alumni Bulletin, The Baupost Group President Seth Klarman rips into former Fed Chairman Alan Greenspan:

As Fed chairman, when he advised people not very many years ago to take out variable rate mortgages, he aided and abetted the housing market excesses. When he said there was irrational exuberance in the market [in 1996], he was basically right. But then he didn’t act even though he had plenty of levers he could have pulled that didn’t have to do with changing interest rates. He could have raised margin requirements, for example. But instead, he came up with the ridiculously lame idea that bubbles need to be allowed to run and that the Fed can clean up the mess afterward, which only had the effect of inflating subsequent bubbles, most notably the housing bubble that came as a result of the easy money. So he’s just been unaware of the impact of his encouragement, and his inaction got us into the terrible mess we’re in today. It’s not all his fault, but I hold him largely responsible for it.

Klarman also has some choice words for securitized products and those who bought them:

It’s not amazing that securitized products were created. There are huge financial incentives for the people involved. What’s amazing is that anybody actually bought them. That’s because they’re created with a one-dimensional idea of what the economy and the world are going to do. If you have nothing but good times, then securitization makes tremendous sense. But securitization, for all of the commingling and diversification it gives you, also gives you a lack of transparency. So if you have an environment like the one we have now, the assets that have been securitized actually make you worse off than if they were just held as whole loans. The unanswered question is how did the smartest people in the world who run the major Wall Street firms not understand that these products were toxic and end up getting caught with them on their books?

Read the entire interview.

Posted by manualofideas at 12:54 AM | Permalink | Comments (0)

Watch Kian Ghazi of Hawkshaw present the investment thesis on one his favorite stocks, Universal Technical Institute (NYSE: UTI), at Darden Value Investing Conference, November 6, 2008:

Posted by manualofideas at 12:07 AM | Permalink | Comments (0)

Watch Ken Shubin Stein of Spencer Capital talk about cognitive biases and their implications for investors. He also discusses his favorite investment idea, American Express (NYSE: AXP) (starting 13 minutes into the talk). From Darden Value Investing Conference, November 6, 2008:

Posted by manualofideas at 12:01 AM | Permalink | Comments (0)

Yale President Richard Levin said in a budget letter that Yale estimates its far-flung endowment portfolio to have lost a quarter of its value since June 30th:

It is not our custom to announce the mid-year status of our endowment portfolio, but these unusual circumstances call for a departure from custom. Thanks to the outstanding work of David Swensen and his colleagues in the Investments Office, our endowment has declined significantly less than market indices. Taking into account only the value of marketable securities, our investment return from July 1 through October 31 was a negative 13.4%. But this does not tell the whole story. Our endowment is invested in both marketable securities (chiefly stocks and bonds) and “illiquid” assets, such as real estate and private equity investments that are not traded on a daily basis and are difficult to value with precision. The value of our marketable securities has declined further since October 31, and, even earlier, we began to establish reserves in anticipation of substantial decreases (“write-downs”) in the value of our private equity and real estate investments. As a consequence, our best estimate of the endowment’s value today is $17 billion, a decline of 25% since June 30, 2008, and this is the value we are using for purposes of budget planning. We are also assuming that the endowment will remain flat during the 2009-10 academic year and resume growth after June 30, 2010, at the rate that we have historically used in our budget modeling.

Read the full statement.

View past Yale Endowment Annual Reports. We highly recommend these reports, as they include excellent descriptions of a variety of important investment and portfolio management concepts, including an explanation of Monte Carlo simulations.

Posted by manualofideas at 05:13 PM | Permalink | Comments (0)

Our quarterly Tobin's Q report and update service was formally announced this morning:

MarketWatch

Visit Tobin's Q Website

Posted by manualofideas at 10:24 AM | Permalink | Comments (0)

The Manual of Ideas is launching a new quarterly report for investment managers and equity strategists entitled, "Equities and Tobin's Q — Evaluating the Market Outlook in the Context of a Century of History." The report is authored by John Mihaljevic, managing editor of The Manual of Ideas, and draws on his past experience as James Tobin's research assistant at Yale to provide unique perspective into this important indicator of future stock market performance. You can buy the current report or subscribe for the quarterly report and update service here.

The Debate: Is Today's Q Giving a Bullish or Bearish Signal for Equities?

Disagreement between leading investment managers and strategists has been remarkable. Consider the diametrically opposed views of two prominent figures:

Bill Gross, the outspoken Managing Director of PIMCO, a leading global investment firm with more than $790 billion in assets under management, asserts that the "Q ratio has almost never been lower and certainly not since WWII, implying extreme undervaluation..."

Meanwhile, Russell Napier, Strategist at CLSA, a leading international brokerage and investment group, claims that the Q ratio supports his expectation of a "horrific" market bottom and another 55% drop in the S&P 500 Index by 2014.

What Is Q Really Saying?

Find out in Tobin's Q and The Outlook for Equities. The report is uniquely equipped to answer this crucial question for equity strategists and portfolio managers:

* Authored by former James Tobin associate. John Mihaljevic is an Economics graduate of Yale who served as Professor Tobin's research assistant from 1996-98. One of Mr. Mihaljevic's key projects while serving in this capacity was to develop and implement a new technique of estimating Tobin's Q.

* Q estimation method used in report was developed in conjunction with James Tobin. Mr. Mihaljevic developed the technique applied in the report in 1996 with the assistance of Professor Tobin, updating the latter's previous method of calculating the Q ratio.

* Historical context reaching back more than 100 years. Tobin's Q and The Outlook for Equities includes data from 1900-2008, enabling the report author to put the current Q ratio in historical context, including the Panic of 1907 and the Great Depression.

About the Author — John Mihaljevic, CFA

Mr. Mihaljevic served as James Tobin's research assistant from 1996-98. In this capacity, Mr. Mihaljevic assisted Professor Tobin in developing a new Q estimation methodology and in periodically updating data related to the Q ratio. Mr. Mihaljevic also assisted Professor Tobin on a variety of macroeconomic research projects at the Cowles Foundation, including researching and editing Money, Credit and Capital, published by McGraw-Hill/Irwin in 1997.

Mr. Mihaljevic is a Chartered Financial Analyst and a summa cum laude graduate of Yale University, having earned distinction in Economics, his major course of study. In addition to working for and studying under James Tobin, Mr. Mihaljevic also studied under Yale Chief Investment Officer David Swensen and Sterling Professor of Economics William Nordhaus.

Mr. Mihaljevic has worked as an investment banker, equity research analyst and investment manager. He currently served as managing member of Mihaljevic Capital Management LLC and managing editor of The Manual of Ideas.

About the Report

In Equities and Tobin's Q, 1900-2008, Mr. Mihaljevic updates on a quarterly basis the Q estimation technique he developed with Professor Tobin in 1996-97. The inaugural report includes Flow of Funds data released by the Federal Reserve on December 11, discusses implications for equity investors, and puts the Q ratio in historical context. The report includes the following:

* Latest estimate of Tobin's Q, using data released by the Federal Reserve on December 11

* Implications for equity investors, based on placing the current Q ratio in historical context and interpreting it as James Tobin might have done

* Charts showing Q going back to 1900, including a comparison of three Q estimation methods: (1) Blanchard, Rhee and Summers, (2) Tobin (old), and (3) Tobin (new) -- Mr. Mihaljevic's calculation, developed jointly with Tobin in mid-1990s

* More than 100 years of Q data (1900-2008), provided in Excel via password-protected download link

* Subscription-based quarterly update service includes ongoing Tobin's Q updates based on the Fed's quarterly Flows of Funds release and other data, as well as commentary putting the latest ratio in historical context and evaluating implications for future market performance

About Tobin's Q

Tobin conceptualized the Q ratio as a measure of over- or undervaluation of publicly traded assets. In its simplest form, Q equals market value divided by replacement cost. If the market value of an asset exceeds the cost of replacing it (Q>1), there is an incentive to recreate that asset and immediately sell it in the market at a premium to cost. As a result, incremental real investment will tend to force high Q ratios back down to parity. No straightforward balancing mechanism exists in the case of low Q ratios, i.e., when the market is valuing an asset below its replacement cost (Q<1). When Q is less than parity, the market seems to be saying that the deployed real assets will not earn a sufficient rate of return and that, therefore, the owners of such assets must accept a discount to the replacement value if they desire to sell their assets in the market. If the real assets can be sold off at replacement cost, for example via an asset liquidation, such an action would be beneficial to shareholders because it would drive the q ratio back up toward parity. In the case of the stock market as a whole, rather than a single firm, the conclusion that assets should be liquidated does not typically apply. A low Q ratio for the entire market does not mean that blanket redeployment of resources across the economy will create value. Instead, when market-wide Q is less than parity, investors are probably being overly pessimistic about future asset returns. Several studies have shown that stock market investments at times when the q ratio was less than parity have produced above-average long-term returns.

Posted by manualofideas at 09:20 AM | Permalink | Comments (0)

Blogs:

• Simoleon Sense -- build your latticework of mental models and think strategically
  
• The Investor's Consigliere -- learn about manager selection and investing in hedge funds
  
• The Kirk Report -- stay on top of the market with timely reporting and content links
  

Posted by manualofideas at 06:28 PM | Permalink | Comments (0)

In the spirit of Charlie Munger's latticework of mental models, we recommend a wonderful interview with Richard Feynman, the late physicist and Nobel Laureate.

It is impossible to do this interview justice in a brief summary. Suffice it to say that it exposes Feynman as one of those rare creatures who are truly in love with their chosen subject -- and with life itself. Buffett is another such individual.

Part 1 of 6:

Part 2 of 6:

Part 3 of 6:

Part 4 of 6:

Part 5 of 6:

Part 6 of 6:

Posted by manualofideas at 12:14 AM | Permalink | Comments (0)

Watch Economics Nobel Laureate Joseph Stiglitz speak on current macroeconomic issues (presented on November 14th). Watch a highlight of his speech or the entire event. We also recommend browsing around the FORA.tv website, as it contains a lot of great content on economics and public policy.

For Stiglitz fans, we also recommend watching his Authors@Google talk on globalization in October 2006.

Posted by manualofideas at 10:51 PM | Permalink | Comments (0)

One of the most fascinating aspects of the Madoff fraud is the fact that investors in Madoff funds apparently turned a blind eye to Madoff's use of a no-name accounting firm:

Bernard L. Madoff Investment Securities LLC used Friehling & Horowitz, an auditor operating out of a 13-by-18 foot location in an office park in New York City’s northern suburbs.

We wonder what excuse Madoff gave clients who inquired about the peculiarity of such a prominent investment manager using such an inadequate audit firm. Did Madoff say, "Well, we know everything is kosher, so we don't really care about paying extra for a big audit firm." Or did Madoff say, "If you're going to invest with Madoff, there needs to be an element of trust. The way you show that you trust us is by not letting the choice of our audit firm prevent you from investing."

Whatever Madoff's brushoff was, it worked. Many investors are blinded by greed -- and who would not be greedy for steady positive monthly returns even in times of market turmoil?

Posted by manualofideas at 12:07 AM | Permalink | Comments (0)

The following is Michael Milken's talk in 2001:

Posted by manualofideas at 02:04 PM | Permalink | Comments (0)

The New York Times reports that Citadel has halted redemptions after major losses in its funds. With an increasing number of hedge funds halting redemptions, investors are finding out that getting back their capital isn't what they tought is was -- a right. Instead, withdrawals are increasingly becoming a privilege, one that may be granted when times are good but that becomes unavailable precisely at the moment most investors want their money back.

Posted by manualofideas at 08:39 AM | Permalink | Comments (0)

The Manual of Ideas has made available for free the inaugural issue of its monthly subscription-based Downside Protection Report. DPR seeks out stocks with an exceptionally large margin of safety. Featured companies are judged to have low risk of permanent impairment, below-average price volatility and above-average capital appreciation potential.

Editor's Perspective (excerpted from full report):

Downside protection used to be easy. Investors looking for a safe way of participating in the stock market could buy “blue chips” and sleep soundly at night. No longer. With staples such as General Motors (NYSE: GM), Citigroup (NYSE: C) and General Electric (NYSE: GE) down anywhere from 50% to more than 80% in the past year, it’s clear that blue chips are no place to hide.

But the damage goes beyond temporary price declines. Several companies thought of as safe and stable until recently have suffered catastrophic—and, thanks to dilutive bailouts, almost certainly permanent—impairments of capital. The list includes giants American International Group (NYSE: AIG), Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM).

CEOs and directors of a subset of the largest and most widely owned American corporations engaged in stunningly irresponsible risk taking during the recent period of over-leveraging and corporate excess. As we throw out all sorts of preconceived notions about self-regulating markets, the wisdom of our “best and brightest” business leaders and the capacity of government to protect our financial system, it is also time to throw out the term “blue chip.”

Small caps are no panacea either. The Russell 2000 index of U.S. small-capitalization stocks ($905 million average and $345 million median market value) is down 39% year-to-date through December 5th. The Russell Microcap index of the smallest public companies ($275 million average and $100 million median market value) has fallen 44% during the same period.

What is a common stock investor to do, short of fleeing from the market altogether at an inopportune time, and short of resorting to strategies that involve short selling or option buying? With consistent effort and a focus on individual businesses rather than entire market segments, investors can take advantage of today’s environment by investing in companies with low fundamental downside and large upside. Our task is to unearth such stocks—and bring them to you. As Warren Buffett once advised, be ready to profit from folly rather than participate in it.

Access the full report here.

Disclaimer: Copyright 2008 by BeyondProxy LLC, the publisher of The Manual of Ideas. BeyondProxy and its affiliates may have positions in and may make purchases or sales of the securities discussed in this report. It is the policy of all Related Persons to allow a full trading day to elapse after the publication of this report before purchases or sales of any securities discussed herein are made. No Related Person held a position in any companies discussed in this post as of the date of publication of this report. Use of this report and its content is governed by the Terms of Use described in detail here.

Posted by manualofideas at 08:05 AM | Permalink | Comments (0)

The Manual of Ideas has made available for free the inaugural issue of its monthly subscription-based Downside Protection Report. DPR seeks out stocks with an exceptionally large margin of safety. Featured companies are judged to have low risk of permanent impairment, below-average price volatility and above-average capital appreciation potential.

Summary Investment Thesis (excerpted from full report):

An investment in Greenlight Re should outperform the market in times both good and bad, due to David Einhorn’s superior investment skill and Greenlight’s strategy of selling stocks short in addition to buying them. We estimate fair value at $18-24 per share, based on the analysis presented in this report.

39-year-old David Einhorn has had phenomenal success managing Greenlight Capital (not the same legal entity as Greenlight Capital Re), a value-oriented hedge fund that has grown into a billion dollar firm from humble beginnings, with only $1 million in assets in 1996. While returns have suffered this year, we estimate that Greenlight has delievered an annualized return since inception, net of all fees and expenses, of more than 20%. This is an impressive feat considering that the fund navigated through both the bursting of the Internet bubble in 2001-02 and the ongoing U.S. credit contraction and recession. Also impressive is the fact that Einhorn achieved such returns while maintaining relatively low net exposure to equity markets, due to a strategy of buying undervalued stocks and selling short overvalued, mismanaged or downright fraudulent companies.

Greenlight Re went public in May 2007 as a publicly traded version of Einhorn’s hedge fund, with several enhancements:

- Tax-advantaged structure by virtue of Cayman Islands domicile, making Greenlight Re a pass-through vehicle for U.S. investors.

- Reinsurance underwriting should add value, an aspect that is unique to Greenlight Re as compared to Einhorn’s hedge fund. Underwriting is conservative, with significant unutilized capacity and most premiums related to frequency rather than severity business.

- Investors may sell their shares in the open market at any time, a liquidity benefit not available to hedge fund investors.

- Repurchases should accelerate growth of per-share value, as Greenlight Re may buy back stock at a discount in times of market distress. The Board authorized a two million-share buyback in August.

- Investors should benefit from price-to-book multiple expansion over time, as the market comes to appreciate Einhorn’s investment skill. This may allow investors buying at current prices and selling in the future to get paid for the discounted value of Einhorn’s “alpha.”

Einhorn is incentivized to grow shareholder value, as he owns 17% of Greenlight Re. He also has a track record of fair treatment of investors.

We judge Greenlight Re shares to have superior downside protection due to (1) their discount to book value, (2) Einhorn’s proven ability to generate investment outperformance, (3) a conservative underwriting posture, (4) an ability to repurchase shares below fair value, thereby limiting the downside and increasing future upside, and (5) an ability to go long as well as short in the stock market, enabling Greenlight to seize opportunities regardless of overall market direction.

Access the full report on Greenlight Capital Re here.

Disclaimer: Copyright 2008 by BeyondProxy LLC, the publisher of The Manual of Ideas. BeyondProxy and its affiliates may have positions in and may make purchases or sales of the securities discussed in this report. It is the policy of all Related Persons to allow a full trading day to elapse after the publication of this report before purchases or sales of any securities discussed herein are made. No Related Person held a position in GLRE as of the date of publication of this report. Use of this report and its content is governed by the Terms of Use described in detail here.

Posted by manualofideas at 07:39 AM | Permalink | Comments (0)