Was out of VSE at a 34% profit last week, annualized about 60%. Ok.

AMR is suffering big time. All my fortunes are tied to it now. Doesn't look too good. It may go down to $11-12 and then won't be able to look at my brokerage account any more. Not that its easy now.. Selling seems overdone, but given huge debt and high oil prices, the market seems to be right in marking it down so much. May take a couple of years and some luck. Also, maybe coming consolidation in airlines and its spinoff of Eagle may be good for AMR. Suspect though that there may be year end tax selling that's also at play. The 30 day wash rule should make this one rebound a bit in February. Some of the favorite homes on Zillow seemed to have dropped in value recently, kind of heartening.

Had a great time in Maui. Also donated to Smile train today.

From Investment Gurus by Peter Tanous:

Peter Lynch : The problem with technical analysis is that somebody could love the stock at 10 and hate it at 6. But I have traditionally liked one formation. The stock goes from 50 to 8, then is goes sideways for a few years between 8 and 11. Now if something goes right with this company, the stock is going north. These make a nice research list. You look at stocks that have bottomed out. Its like trying to catch a falling knife, you want the knife to stick in the wood. When it stops vibrating, you can pick it up.

Laura Sloate : In 1973, I couldn't find any stocks that were cheap enough. Management was on my case since I wasn't generating any commissions. At that point, I realized that if you worked for a big company, you would be controlled by the management.

If the average return on invested capital is less than the cost of the capital, you know its a poorly managed company. If we look at our stocks through 91-94, 12 of the 15 stocks that we sold because of a sell discipline of selling at 15% decline, 12 of these were higher six months later when we originally bought them, and a couple were real winners. So, we modified our sell discipline, we don't let it go down and not do anything. Its an evolution of process based on examination of results. Statistically we found that in 80% of the cases, if we had kept the stocks we sold six more months, we would have made money. Most of the bad stuff is in the price; we sometimes bought prematurely.

From Friends, Lovers, Chocolate by Alexander McCall Smith:

A good work, once drawn attention to by its author inevitably becomes an exercise in self-congratulation.

It always surprised her that her niece seemed uninterested in what people did. For Isabel, it was fundamentally important information if one were even to begin to understand somebody.

A Scotswoman would expect equality and consideration in marriage unlike an Italian woman.

The sentiment sounded trite as most good sentiments did. It was hard to make goodness and good people sound interesting. Yet the good are worthy of note, because they battled and that battle was a great story.

The Germans deserved great credit for their moral seriousness, which is why Isabel liked them so much. Anyone was capable of doing what they did in their historical moment of madness - and their goodness lay in the fact that they later faced up to what they had done.

Everybody's job is like that, I wash things and then they become dirty again. Even the Queen's job is like that. The Queen signs one law and then they pass another. She opens one bridge and then they build another.

What is patriotism but the love of the good things that one saw and ate in childhood?

"Nothing gives one person so much advantage over another as to remain cool and unruffled under all circumstances." -- Thomas Jefferson

Wow, just shaved off about 25% of ytd return. Bought more AMR. just made a death wish most likely. OH well, need to go back and finish accounting book and corporate finance book. Also, ordered Martin Whitman's Value investing from the library. These three are essential.

From A Short History of Financial Euphoria by John Kenneth Galbraith :

The only remedy is an enhanced skepticism that would resolutely associate too evident optimism with probable foolishness and that would not associate intelligence with the acquisition or administration of large sums of money.

A further rule is that when a mood of excitement pervades a market or surrounds an investment prospect, when this is a claim of unique opportunity based on special foresight, all sensible people should circle the wagons; it is time for caution. Perhaps, indeed, there is opportunity, but a rich history provides proof that as or more often, there is only delusion or self-delusion.

So, comes down to being fearful when others are greedy and greedy when others are fearful. Buffett was right all along with his one liner as was Templeton.

From Isabel in The Right Attitude to Rain :
That woman would like to be elsewhere thought Isabel; as so many people would. How many of us are happy to be exactly where we are at the moment? Only the completely happy think that they are in the correct place.

Never heard it put so well. Iam extremely happy :)

Why we need a recession -- soon
By Jon Markman
Check out the pessimistic housing headlines. When there's this much smoke, usually there is not just fire but a raging hell storm about to be cut loose. And Lord knows, there's much dry tinder available to the forces of financial doom, what with residential construction stopped cold, Detroit automakers idling and virtually the entire financial-services work force dusting off resumes.

So is the inferno really upon us? Well, no. And that's a pity because recessions clear out the excess optimism, debt and inventory that collect during long stretches of expansion. Moreover, a recession delayed may be a recession that turns into a real whopper.
Banking analyst Richard Bove points out that debt in the U.S. economy over the past 5 years has grown at a pace 3 times faster than income. Nominal gross-domestic-product growth has advanced at 3% while financial debt has grown at a 9.7% clip to $13.8 trillion.
As consumers collectively quit spending, retailers see inventories pile up, manufacturers fire workers, unemployment explodes and wage growth collapses.

Just as heroin dealers are in business to sell drugs, banks are in business to make loans. Their financial engineers will do everything in their power to force debt down consumers' throats.

Because the administration in Washington knows that if all those loans are called in and consumers can't make good on them, there will be hell to pay. And a nasty recession just won't do in an election year.
So the government is in the process of twisting the arms of Fed members to lower interest rates. That will allow banks to go back to one of their favorite recession-delaying ploys: encouraging debt-strapped consumers to refinance their loans at lower rates.

Banks took big write-downs this past October.
Investors will let them get away with that sort of rudeness only once. If the banks do it again -- shareholders are likely to slaughter the bank stocks, pushing them down at least another 20%.
"Bad loans are going onto their balance sheet faster than they can write them off," he said.
Once investors determine that the banks' bad loans are out of control and that the risk cannot be adequately measured, they will sell first and ask questions later. So, we are about to enter even more interesting times. A debt-led recession punctuated with joblessness and foreclosure is almost certainly en route. The only questions are whether it comes early next year or in 2009, and how deep a hole we'll need to dig for the burial. Whatever the timing or depth, continue to avoid the bank and brokerage stocks.

Fine print One of the first groups of companies to go in a recession: restaurants that serve the upper middle class. Recent victims include McCormick & Schmick's (MSSR, news, msgs) and P.F. Chang's China Bistro (PFCB, news, msgs).

Strangely, some stocks tend to do well in a recession, including REITs, insurance companies and, for some reason, containerboard makers. Also keep in mind that the best time to buy stocks for the long term is right smack in the middle of a recession, so you will want to start buying the banks and home builders once their currently hidden problems are more fully reflected in their stock prices. For more on the banks' issues, read my Sept. 14 column, "What the big banks aren't telling you -- yet."

Samuel Johnson quotes this time..

• A fly may sting a stately horse and make him wince; but one is but an insect, and the other is a horse still.
• A wise man will make haste to forgive, because he knows the true value of time, and will not suffer it to pass away in unnecessary pain.
• Books like friends, should be few and well-chosen.
• Curiosity is one of the most permanent and certain characteristics of a vigorous intellect.
• Where there is nothing but pure misery there never is any recourse to the mention of it.
• Every man who attacks my belief, diminishes in some degree my confidence in it, and therefore makes me uneasy; and I am angry with him who makes me uneasy.
• Getting money is not all a man's business: to cultivate kindness is a valuable part of the business of life.
• I look upon every day to be lost, in which I do not make a new acquaintance.
• If a man does not make new acquaintances as he advances through life, he will soon find himself left alone.
• It is better to remain silent and be thought a fool, than open one's mouth and remove all doubt.
• Nothing will ever be attempted if all possible objections must first be overcome.
• Poverty is a great enemy to human happiness; it certainly destroys liberty, and it makes some virtues impracticable.
• Self-confidence is the first requisite to great undertakings.
• The true measure of a man is how he treats someone who can do him absolutely no good.
• Those who attain any excellence, commonly spend life in one pursuit; for excellence is not gained upon easier terms.
• To be happy at home is the ultimate result of all ambition.
• We are inclined to believe those whom we do not know because they have never deceived us.
• What is easy is seldom excellent.
• What we hope ever to do with ease, we must learn first to do with diligence.
• Worth seeing? Yes; but not worth going to see.
• You can't be in politics unless you can walk in a room and know in a minute who's for you and who's against you.
• You hesitate to stab me with a word, and know not - silence is the sharper sword.

Confucius quotes

• "The strength of a nation derives from the integrity of the home."
• "The superior man is distressed by the limitations of his ability; he is not by the fact that men do not recognize the ability that he has."
• "The superior man is modest in his speech, but exceeds in his actions."
• "Never contract friendship with a man that is not better than thyself."
  "The wheel of fortune turns round incessantly, and who can say if I shall today be uppermost."
• "To be wronged is nothing unless you continue to remember it."
• "It does not matter how slowly you go, so long as you do not stop."
• "Instead of being concerned that you have no office, be concerned to think how you may fit yourself for office.
• "To know, is to know that you know nothing. That is true knowledge."
• "Five things constitute perfect virtue; gravity, generosity of soul, sincerity, earnestness, and kindness."
• "The cautious seldom err."
• "Silence is a true friend who never betrays."
• "Everything has beauty, but not everyone sees it."
• "Choose a job you love, and you will never have to work a day in your life."
• "When anger rises, think of the consequences."
• "A journey of a thousand miles begins with a single step."
• "The superior man, when resting in safety, does not forget that danger may come.

Loath to leave the company, enjoying current visibility enormously. Feels good to work on projects that are wanted and cared about so much. First time working on highly visible projects and hope it lasts.

Buffett said that he had read Graham and Dodd's book many times and had even read it to his wife on their honeymoon in 1952.
"It might not seem romantic, but I felt she ought to read it," Buffett recalled.

Follow Your Bliss by Van Tharp
Author Joseph Campbell described the message of “follow your bliss” to be his ultimate teaching. It’s like a message from God. If you do what you love to do, then you are probably doing what the universe intends for you to do.
A few years ago I had a client who wanted to start trading. He still needed trading capital. Instead, he was busy building a house and investing all his time into that house.
I suggested that he meditate on —what he loved to do and what he was attached to in his life. Did he love his house so much that he was willing to spend the next 20 years at a job he hated just to pay for it? If you don’t love what you do, you’ll face stress and possible burnout. If you love what you do, then you’ll have the energy and excitement to make what you want a reality.

Quiet your mind and let your thoughts come and go. Afterwards write down a list of all of the things/activities you really love. What really turns you on?

Then make a list of the things to which you are attached-things really important to you. Now, notice if there are any of your attachments that are so important that you would be willing to make you spend 20 years of your life doing something you hate.

Beautiful article in WSJ : The Secrets of Intangible Wealth by Ronald Bailey

A Mexican migrant is five times more productive in the US than he is back home. Why is that ?
According to some remarkable but largely ignored research - by the World Bank, of all places - it is because the average American has access to $418,000 of intangible wealth, while the stay-at-home Mexican's intangible wealth is just $34,000. But what is intangible wealth and how is it measured ? Two years ago, World Bank set out to assess the contributions of various kinds of capital to economic development. Its study "Where is the Wealth of Nations ? Measuring capital for the 21st century", began by defining natural capital as the sum of nonrenewable resources and produced or built capital as sum of machinery, infrastructure etc. But once the value of all these are added, the economists found something big was missing : The vast majority of the world's wealth!

The rest of the result of the "intangible factors"-such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts productivity and results in higher total wealth. 80% of wealth in rich countries and 60% in poor countries is of this intangible type. What the World bank economists have done brilliantly is to quantify the intangible value of education and social institutions. The bottom line : "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity." The rule of law accounts for 57% and education accounts for 36% of intangible capital. Switzerland scored 99.5 on the rule-of-law index while the US scored 91. By contrast Nigeria's score on this is 5.8. Overall the average per capita wealth in the OECD countries is $440,000, consisting of $10,000 in natural capital, $76,000 in produced capital and a whopping $360,000 in intangible capital. Low income countries in contrast have $7,216 per person. Consists of $2,075 in natural capital. $1,150 in produced capital and $3,991 in intangible capital. Through rampant corruption, some are destroying their intangible capital and ensuring that their people will be poorer in the future. Who wouldn't walk across the border in such circumstances?

The World bank study bolsters the deep insights pf the late development economist Paul Bauer. In his brilliant "Dissent on Development" Bauer wrote : If all conditions for development other than capital are present, capital will soon be generated... If however the conditions for development are not present, then aid will be necessarily unproductive and therefore ineffective. Thus if mainsprings of development are present, material progress will occur even without foreign aid. If they are absent, then it will not occur even with aid. This path breaking study demonstrates that the mainsprings of development are the rule of law and a good school system. The big unanswered question is : How can people rid themselves of the kleptocrats who loot their countries and keep them poor?

Buffett went on to stress the importance of temperament when it comes to investing, saying: “Independent thinking, emotional stability and a keen understanding of both human and institutional behaviour is vital to long-term investment success.”

The Rule of 72

The 'Rule of 72' is a simple way to calculate the number of years to double your money : divide 72 by your annual returns and the number of years it takes your money to double follows.

So, if you expect an annual return of 12%, it takes 6 years to double your money (72 / 12 = 6). You can also calculate the 'required return': Divide 72 by the number of years. If you have 10 years to double your money, you need 72 /10 = 7.2%. Only 5 years? Your required annual return would be 72 /5 = 14.4.

From Bertrand Russell's "In Praise of Idleness". Would not survive without his writings.

There will be happiness and joy of life, instead of frayed nerves, weariness, and dyspepsia. Originality will be unhampered, and there will be no need to conform. Ordinary men and women, having the opportunity of a happy life, will become more kindly and less persecuting and less inclined to view others with suspicion. Good nature is, of all moral qualities, the one that the world needs most, and good nature is the result of ease and security, not of a life of arduous struggle. Hitherto we have continued to be as energetic as before machines; we have been foolish.

Charles Ellis

From Charles Ellis's book "Winning the Loser's Game", this book was actually written for professional money managers :

• In a loser's game, the outcome is determined by the mistakes made by the loser.
• In amateur tennis, the victor gets a higher score because his opponent is losing even more points.
• So staying back, and keeping the ball in -- is good strategy for amateur tennis players.
• Focus on not making mistakes.
• Regression to the mean is too powerful.
• Despite the enticing appeal of reducing market exposure by astute sales when the securities appear to be overpriced and boldly reinvesting when prices have declined to attractive low levels, market timing does not work.
• So much of the "action" occurs in such brief periods and at times when we are captives of conventional consensus.
• Taking out the 10 best days from a 5 year period, reduced the return from 18% to 12%.
• Impossible to know when the "best" days will occur.
• Better to stay invested waiting for the "best" days rather than miss out.
• So, say the "long-termers", stay invested through the rough times, that's the only sane ways to make sure you're there for the good times!
• Unfortunately, security analysis, does not appear to be a useful or profitable activity. Stocks that investment managers sell after doing fundamental research , and the stocks they don't buy, typically do as well as the stocks they do buy.
• Problem is that security analysis is done so very well by so many.
• You can do more for your portfolio by developing and sustaining wise long-range policies than by skillful manipulations of the individual holdings within the portfolio.
• Time is Archimedes' lever in investing
• Give a portfolio time to evolve.
• Sell when you want to, not when you have to.
• If the time period is long, the wise investor can commit without great anxiety to investments that in the short run appear to be very risky.
• Time transforms investments from least attractive to most attractive.
• 3 types of risks : Price risk (price paid), interest rate risk, business risk (business failure).
• The central fact about both stock group risk and individual stock risk is that "they do not need to be accepted" by the investor. They can be eliminated. Risk that comes from investing in particular market segments or specific issues can be diversified away - to oblivion.
• The great secret for success in long-term investing is to avoid serious losses.
• POLICY is the MOST EFFECTIVE ANTIDOTE to PANIC.
• If a major decision is truly fiduciary in nature, it never needs to be done quickly. Time urgent decisions are never fiduciary.
• The long, sad history of market timing is clear: Virtually nobody gets it right even half the time. And cost of getting it wrong wipes out the occasional gain of getting it right.
• If you find yourself caught up in the excitement or a rising market or distressed by a falling market, STOP. Break it off. Go for a walk and cool down.
• When you feel euphoric, you are probably in for a bruising.
• When you feel down, remember its darkest hour before dawn- and take no action.
• The secret to long-term success is benign neglect.
• Leave compounding alone to do its good work for you.
• Most of our blunders are emotional, not computational. How your investments behave is beyond your control. But how you behave in response to fluctuations is within your control.

From one of my favorite books "John Neff on investing" :

• If we shared a compartment on a long train ride, what you read here is what I would tell you about investing.
• Individuals enjoy a key advantage over professionals, you can pick and choose and bide your time unflustered by the fierce and corrosive quarterly performance sweepstakes.
• Value investing demands sober reflection. Scarce to begin with, and even scarcer in bull markets.
• Now and then a windfall, but mostly a trudge. If you're in too big a hurry, a mattress may be better to store your money.
• I attribute success not to genius or blinding insights, but to a frugal nature and lessons well-learned.
• The more I delve into the past, the more I see lessons that ultimately played out in my choice of career. Perseverance, sympathy for the woebegone, frugality, stubbornness, and integrity, together with an inclination to flout convention and a penchant for rigorous analysis-these qualities form the building blocks for a successful investment strategy.
• Shortcuts usually grease the rails to disappointing outcomes.
• Bargain shopping made an impression on me. I've never bought a stock unless it was on sale.
• I was probably not the easiest of sons to deal with, but he was a difficult man. Over the slightest infractions, he harangued people who worked for him. His behavior did not fit my definition of civility. Though ethical and honest, he was extremely demanding and especially sympathetic. To some degree, I inherited his tendency to be demanding. But my father was not very happy, and bitterness added sting to his demands.
• The capacity of investors to believe in something too good to be true seems almost infinite at times.
• We followed one durable investment style whether the market was up, down or indifferent. (Low P/E, Growth excess of 7%, Yield protection, Solid companies in growing fields, Strong fundamental case)
• You don't need stunning growth rates. Absent stunning growth rates, low P/E stocks can capture the wonders of P/E expansion with less risk than skittish growth stocks.An increase in the P/E ration coupled with improved earnings, turbocharges the appreciation potential. e.g. (Static P/E : EPS - $2, Market price - $26, P/E - 13, Growth - 11%, Expected earnings - $2.22, New P/E - 13, New Market price - $28.86, Appreciation potential - 11% VS Expanded P/E : EPS - $2, Market price - $16, P/E - 8, Growth rate - 11%, Expected Earnings - $2.22, New P/E - 11, New Market price - $24.42, Appreciation potential - 53%)
• Windsor was not fancy. As in tennis, I tried to keep the ball in play and let my adversaries make the mistakes. I picked stocks with low p/e multiples primed to be upgraded in the market if they were deserving, and endeavored to keep losers at break-even levels.
• For Windsor's purposes, a low p/e multiple usually languished 40-60% below the prevailing market multiples.
• Low p/e companies growing faster than 7% a year tipped us off to underappreciated signs of life, particularly if accompanied by an attention-getting dividend.
• When news circluates that a company has missed an earnings estimate, it is normally compared to a consensus. If the company's fundamentals remain strong, low p/e investors often recognize buying opportunities.
  
  

The Tao of Buffett.

• The smarter the journalists are, the better off society is.
• My idea of a group decision is to look in the mirror. (Has a history of standing alone that dates back to the early days of his investments.)
• Rule No.1: Never lose money. Rule No. 2: Never forget rule number 1. (Apparently he drove an old VW beetle long after being a multimillionaire. Didn't know that)
• You can' make a good deal with a bad person. (If you even have to ask yourself if you trust somebody, you should immediately leave the negotiating table and look for more honest company to do business with)
• If is easier to stay out of trouble than get out of trouble.
• It is not necessary to do extraordinary things to get extraordinary results.
• My idea of a group decision is to look in the mirror.(Not one to seek affirmation from others, because so many of his ideas are opposite from what the herd is thinking.To make big money you have to be comfortable standing alone)
• With each investment you make, you should have the courage and conviction to place at least 10% of your net worth in that stock.
• Accounting is the language of business. (When Warren was asked by the daughter of one of his business associates what courses to take in college, he replied "Accounting - it is the language of business")
• Read Graham and Fisher, read annual reports but don't do equations with Greek letters in the them.
• There comes a time when you ought to start doing what you want. Take a job that you love. You will jump out of bed in the morning. I think you are out of your mind if you keep taking jobs that you don' like because you think it will look good on your resume.
• The business schools reward difficult, complex behavior more than simple behavior, but simple behavior is more effective.
• There is nothing like writing to force you to think and get your thoughts straight.(If you can't write about it, you haven't really thought about it).
• The less prudence with which others conduct their affairs, the greater prudence with which we should conduct our own affairs.
• A person's main asset is themselves, so preserve and enhance yourself.
• In the search for companies to acquire, we adopt the same attitude one might find appropriate in looking for a spouse: It pays to be active, interested, and open-minded, but it does not pay to be in a hurry.
• We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
• If you don't make mistakes, you can't make decisions.
• If you understand an idea, you can express it so others can understand it.
• If they need my help to manage the enterprise, we are probably both in trouble.
• At the beginning, prices are driven by fundamentals, and at some point, speculation drives them. What the wise man does in the beginning, the fool does in the end.
• The smartest side to take in a bidding war is the losing side.
• Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be mis-appraised.
• Uncertainty is the friend of the buyer of long-term values.
• We do not have and never will have an opinion on where the market, interest rates or business activity will be in a year from now.
• That which is not worth doing is not worth doing well.
• I buy stocks when the lemmings are headed the other way.
• You only have to do a very few things right in your life so long as you don't do too many things wrong.(Warren decided early in his investing career that it would be impossible for him to make hundreds of right investment decisions, so he decided only to invest in businesses he was absolutely sure of and then bet heavily on them).

In the short run the market is like a voting machine and in the long run it is a weighing machine. Just really understood this today. The weighing machine is never wrong! So in the long term, the market will get it right. From Joel Greenblatt:

• Over the short term, Mr Market acts like a wildly emotional guy who can buy and sell businesses at highly depressed or highly inflated prices.
• Over the long run, Mr Market gets it right.

So if do have bad stocks, be scared that Mr Market will get it right soon enough. :(

Kelly criterion and probability, stock will go down after purchase

• Answer: People overweight the most recent information. They overreact to dramatic information, or dramatic circumstances. They tend to have what's called outcome bias, which is they judge things on their outcome, and not on their process.
• Question: What's the Kelly criterion?
  Answer: What it tells you is what fraction of your bank roll you should commit to any particular probabilistic endeavor, if you know the probabilities that pertain to it. And if you know those preconditions, you will either maximize your bankroll at the fastest possible rate, or you'll minimize your loss at the slowest possible rate.
  The rough formula, is:
  2p - 1
  where p is the probability [converted from percentage to decimal form]. So, to make it easy, if you were 100% certain that a particular investment would pay off at your expected rate, then 2 times that p is 2.0, minus 1, yields 1. That means 100% of your bankroll should go into that investment.
  Now if you were only 60% sure, then it would be two times .60, which is 1.20, minus 1, equals .20. So 20% of your bankroll should go into that proposition.
  It also shows that if you have less than a 50/50 proposition, you shouldn't bet at all. Which again, makes perfect sense.
• You have to be confident that you have an edge, And if you can't identify that edge, you probably don't have it. And if you can't identify it, you probably shouldn't commit the capital to it.
• Answer: I would advise them basically to understand, A) people are overconfident, B) that therefore whatever probability you think you have of being right, it's probably less than you think. If you think you have a small edge, you probably don't have any edge at all.
• You know, Bernard Baruch said nobody buys at the bottom and sells at the top except for liars. So what follows from that is, if you're not buying at the bottom and selling at the top, then that stock will go down after you bought it. And it will go up after you sold it.
• Answer: Right. So you need to understand that your stock will go down after you buy it, and it will go up after you sell it. But what you want it to do is go down immediately after you bought it, and be lower then. You don't want it to be lower three years, or five years, or ten years. If you understand this, then the strategy of being willing to lower your average cost [by buying more when a stock drops] is a great strategy.
• Question: I have a theory that great investors are not unemotional, but inversely emotional: They get worried when the market is making most people happy, and they feel good when everyone else is worried about it. Ben Graham had that quality, and so does Warren Buffett. Do you see that in yourself?
• Answer: [veteran trader] Richard Dennis got these 10 people he was going to teach how to trade according to his system. And the system was mechanical. There was no judgment involved. And as it turned out, that after two months of trading, he was the only one of the 10 people that actually followed the system.
• And the reason was, all these behavioral things. Because the system showed you lots of losses. And then it would tend to show you big gains. The losses made people nervous, and so the whole point of the book is that Dennis actually had understood or internalized, that there was a whole plethora of behavioral anomalies that will keep people from behaving optimally in capital markets.
• Can an individual investor do what you've done - beat the market for years ?
  Answer: Oh, sure. I think that individuals [are not hampered by the obstacles] that prevent many professionals from behaving in optimal ways.
  And, more importantly, a thoughtful individual investor doing a moderate amount of homework can easily do better than the S&P 500.
  Because that portfolio which is diversified, is just allowed to evolve. They just let the portfolio evolve over time.

"It's much harder to be the guy, the guy losing money three hundred and sixty-four days out of three hundred and sixty-five,because you start questioning yourself. Am I ever going to make it back? Am I really right? What if it takes ten years? Will I even be sane ten years from now?"

Here is what I bought "The Night of the Generals" for :

• "There's a sort of brotherhood which isn't dependent on the accident of blood relationship and has nothing in common with the herd instinct. I drink to the brotherhood of reasonable men"
• "To train a man in blind obedience is tantamount to fostering stupidity. It has nothing to do with leadership. An attempt to inculcate culture and knowledge, on the other hand, presupposes culture and knowledge on the part of the teacher. Building up an army must be a mental process. If you are training a soldier to preserve peace you must train him to be a human being"
• "A general knows that in war-time he must be prepared to take this hardest of decisions unflinchingly. That being so, he has no choice but to approach his task with profound humility. He must be fully aware of his special relationship to the highest price a human being can pay"

Also thought of "Letters from Iwo Jima" when reading this. Helpless to think of jawans under control of ruthless stupid men. How do these ever become generals? Are we a stupid race overall to allow the worst of men to be our leaders? Why is stupidity and cruelty so pervasive?
Salivating over BAC and C. Why didn't I buy LYO after reading the round table ?! Lost a good opportunity. Another decent one seems KAMN. Went to jazzercise today.

To be happy at home is the desired result of all ambition. - Samuel Johnson.

Hmm, no need for more ambition from me, Iam already happy as a lark at home :) Now if only that WFMI would go up.. that would be perfect!

Inner Game of Tennis quotes

Federer definitely has the Inner Game but Nadal should have won today, he was the better player to watch.

Quotes from the Inner Game of Tennis

• Conscious trying often produces negative results.
• The best players know that their peak performance never comes when they're thinking about it.
• "Getting it together" requires slowing the mind. Quieting the mind means less thinking, calculating, judging,worrying, fearing, trying, regretting or hoping. One should try and increase the frequency of quieting the mind.
• When we unlearn how to be judgemental, it is possible to achieve spontaneous, concentrated play.
• But who said that Iam to be measured by how well I do things? In fact, who said that I should be measured at all? Who indeed? The value of a human being cannot be measured by performance.
• As long as Self 1 (the conscious self- teller) is ignorant of the true capabilties of Self2(doer), he is likely to mistrust it. This causes him to try too hard, self-condemn and be judgemental. Trust yourself instead.
• Relaxation produces smooth strokes and results from accepting your strokes even if they are erratic
• Perhaps a better way to describe a player who is "unconscious" is by saying that his mind is so concentrated, so focused, that it is still.

From this article on non-conformists, fear same for Tulip :

Then there was my daughter, who was dressed in a demure skirt and blouse. A stranger would never have picked her out as a potential rebel; if anything, she has always been determined not to stand out.

My daughter, who, underneath her shy and somewhat diffident exterior, has always harbored the soul of an iconoclast. While I am volubly contrarian, she has always quietly done her own thing. The truth is, I am of mixed minds about having handed on the mantle of dissent to my daughter. I worry that her instinct to think for herself is as much a curse as a blessing — that she will, end up standing warily on the sidelines.

So although I admire my freethinking daughter, I also feel anxious on her account. My hope is that her idiosyncratic take on the world will lead her to unexpected places rather than to an embittered outlook. Here was a girl who eschewed getting smashed and hooking up.Far safer to bet that she’d get with the program in her own laggardly time and unlemminglike way.

Was reading the Dhando Investor by Pabrai. Talks of the business communities in India.

Marwaris : Simply expect all their invested capital to be returned in the form of dividends in no more than three years. They expect that, after having gotten their money back, their principal investment continues to be worth at least what they invested in it. They expect these to be ultra-low risk bets.

If you use this calculation, you'd quickly take a pass on most investments offered to you.

Free cash flow = money that can be removed from the business

John Templeton interview here.

Q: What signs helped you see that the U.S. technology bubble was about to burst back in 2000?
John Templeton: If you want to have a better performance than the crowd, you must do things differently from the crowd. Four years ago the crowd was piling into tech stocks. The prices went sky-high. I sold my clients' technology stocks, and sold a lot of them short. I have put these philosophies into a simple statement: Help people. When people are desperately trying to sell, help them and buy. When people are enthusiastically trying to buy, help them and sell.

Q: That's a good way to look at it.
John Templeton: That's mainly a joke.

From Buffett's 1961 partnership letter

(expect some goose-bumps) :

• I do not present the tabulations with the idea of indicting investment firms. My own record of investing such huge sums with restrictions on the degree of activity I might take in companies, would be no better, if as good.
• The first section consists of generally undervalued securities (general) where we have nothing to say about corporate policies and as to when the undervaluation may correct itself. This has been our largest category, and more money has been made here than in the other categories. We usually have large portions (5% to 10% of our total assets) in each of five or six generals, with smaller positions in another ten or fifteen.
• Sometimes these work out very fast; many times they take years. It is difficult at the time of purchase to know any specific reason why they should appreciate in price. However, because of this lack of glamour, they are available at very cheap prices. A lot of value can be obtained for the price paid. This substantial excess of value creates a comfortable margin of safety in each transaction.
• This individual margin of safety, coupled with a diversity of commitments creates a most attractive package of safety and appreciation potential.
• Over the years our timing of purchases has been considerably better than our timing of sales. We do not go into these with the idea of getting the last nickel, but are usually content selling out at some intermediate level between our purchase price and what we regard as fair value.
• The generals tend to behave market-wise very much in sympathy with the Dow.
• Just because something is cheap does not mean it is not going to go down.
• With abrupt downward movements in the market, this segment may very well down percentage-wise just as much as the Dow, and during sharply advancing years like 1961, this is the section of our portfolio that turns in the best results. It is, of course, also the most vulnerable in a declining market.
• Out second category consists of “work-outs.” These are securities whose financial results depend on corporate action rather than supply and demand factors created by buyers and sellers of securities. In other words, they are securities with a timetable where we can predict, when we will get how much. Corporate events such as mergers, liquidations, reorganizations, spin-offs, lead to work-outs.
• This category will produce reasonably stable earnings, a large extent irrespective of the Dow. Work-outs have produced our second largest category. At any given time, we may be in ten to fifteen of these; some just beginning and others in the late stage of their development.
• I believe in using borrowed money to offset a portion of our work-out portfolio since there is a high degree of safety in this category in terms of both even results and intermediate market behavior. Results, usually fall in the 10% to 20% range.
• My self-imposed limit regarding borrowing is 25% of partnership net worth.
• Final category is “control” situations where we control the company. Such operations should definitely be measured on the basis of several years.
• Conscious, of inflation, many people now feel that they are behaving in a conservative manner by buying blue chips although regardless of price-earnings ratios, dividend yield, etc. I feel this course of action is fraught with danger.
• There is nothing at all conservative about speculating to just how high a multiplier a greedy and capricious public will put on earnings.
• You will be right, over the course of many transactions, if your hypothesis is correct, your facts are correct, and your reasoning is correct.
• True conservatism is only possible through knowledge and reason.
• I feel the most objective test as to just how conservative our manner of investing is arises through evaluation of performance in down markets. Preferably these should involve a substantial decline the Dow.
• We have never suffered a realized loss of more than ½ of 1% of total net assets, and our ratio of total dollars of realized gains to total realized losses is something like 100 to 1.
• Of course, this reflects the fact that on balance we have been operating in an up market. However, there have been many opportunities for loss transactions even in markets such as these so I think the above facts have some significance.
• Our job is to pile up yearly advantages over the performance of the Dow without worrying too much about whether the absolute results in a gibes year are a plus or a minus.
• I would consider a year in which we were down 15% and the Dow declined 25% to be much superior to a year when both the partnership and the Dow advanced 20%.
• For the reasons outlined in my method of operation, our best years relative to the Dow are likely to be in declining or static markets.
• My father is sharing office space with us (he also shares the expenses) and doing a brokerage business in securities. I expect our overhead, excluding interest on borrowings and Nebraska Intangibles Tax, to run less than .5 of 1% of net assets.
• We have over 90 partners and probably 40 or so securities.
• We presently have partners residing in locations from California to Vermont, and net assets at the beginning of 1962 amounted to $1,178,500.00. Susie and I have an interest in the partnership amounting to $1,025,000.00.

From Seth klarmans margin of safety

From Seth Klarman's book.

• "Being a value investor can be a lonely undertaking. A value investor may experience poor, even horrendous, performance compared with that of other investors during prolonged periods of market overvaluation. "
• "For a value investor a pitch must not only be in the strike zone, it must be in his sweet spot. Above all, investors must always avoid swinging at bad pitches"
• Remember the reason you bought the investment, and if that no longer holds true, then sell the investment.
• "The trick of successful investors is to sell when they want to, not when they have to."
• "Maintaining moderate cash balances or owning securities that periodically throw off appreciable cash is likely to reduce the number of foregone opportunities."
• a. A bottoms up approach, searching via fundamental analysis.
• NPV and IRR are great tools for summarizing data. NPV is the discounted value of all future cash flows that the business is expected to generate. Use this when earnings are predictable and a discount rate can be chosen. When interest rates are unusually low, could cause inflated share prices.
• Analyze liquidation value. Understand what would be an orderly liquidation versus fire sale liquidation. Net working capital = Current Assets – Current Liabilities. Net working capital = Net Working Capital – all long-term liabilities. Operating losses deplete working capital. Look at off balance sheet liabilities, such as under-funded pension plans.
• "working capital / sales ratio" is worthwhile. Discount rates of 12% for first 5 years followed by 15%. These higher rates indicate "uncertainty". Also see insider purchasing.
• Book value is not very useful as a valuation yardstick.
• If you see a company selling inexpensively, ask , "What is wrong with this company?" Like Charles Munger, who advises investors to "invert, always invert. Bargains should be inspected and re-inspected for possible flaws."
• He cited that institutions frowned upon arbitrage plays, and certain companies within an industry were punished without merit. Many institutions cannot hold low-priced securities, and that in itself can create opportunity. He also cites year-end tax selling, which creates opportunities for value investors.
• "Some information is always elusive," hence need to live with incomplete information. Knowing all facts does not always lead to profit. The first 80% of the research is gathered in the first 20% of the time spent finding that research."
• "High uncertainty accompanied by low prices. By the time uncertainty resolved, prices rise." Make decisions quicker, without all of the information, and take advantage of the time others are delving into the same information. The extra time can cause the late and thorough investor to lose their margin of safety.
• "Investment research reducing large piles of information to manageable ones, distilling the investment wheat from the chaff. A lot of chaff and very little wheat.
• Bankrupt Companies Look for Net Operating Losses as a potential benefit. Beauty of investing in bankrupt companies is the complexity of the analysis. This complexity leads to potential opportunity, as many investors shy away from the complex analysis. He cites the example of expensing rather than capitalizing certain expenses.
• Look at off-balance sheet arrangements. (e.g. real estate and over-funded pension plans)
• "As a rule investors should avoid the common stock of bankrupt entities at virtually any price; the risks are great and the returns are very uncertain."
• "All investors must come to terms with relentless continuity of the investment process."

Interesting, Fred Schwed seemed to be fascinated by options back in 1930 :

In defense of the Pure Gamble : Perversely enough, it is the use of options as sheer speculation that exercises a malign fascination on this writer. I do not know of anyone else who has a good word to say about this form of gamble. It would however be monstrous to leave an impressionable reader with the idea that the buying of options is a reliable way to make money. Bu the practice has such few spokesmen that I have taken it on myself to suggest that is has at least as much to recommend it as more approved speculative methods. But before buying the option, at least mull over for a little while the fact that there exists a group of gentlemen who seem to be willing to wager that this stock is not going up in the next 30 days after all.

Most of the great speculators either ended their days in penury or cam sickeningly close to it one or more times. An interesting exception was Hetty Green, but Mrs Green was both a realist and a woman, few great speculators are either.

Statisticians of a nervous, sensitive sort, after a few experiences develop a prose style which would make a German nineteenth century meta physician envious.. Quote from WSJ... If the thoughtful reader will now read that statement backwards, he will discover that its original lucidity is not impaired.
When there is a boom and everyone is scrambling to buy, take everything and sell. Invest the proceeds into conservative bonds. No doubt what you sold will go much higher, but pay no attention to this - just wait for the depression which will come sooner or later. When this depression becomes a national catastrophe, sell your bonds and buy back stock. No doubt the stocks will go lower, again pay no attention. Repeat.

Currently reading "Where are the customer's yachts?", a hilarious book by the wonderfully funny Fred Schwed Jr, a one time laid-back wall street trader who preferred to play golf instead of buzzing about keeping busy for its own sake. I don't remember when I have laughed so hard reading a book. T was quite amused to see me rolling senselessly on the floor.

Charles Munger Wonderful USC commencement speech

USC law school commencement sppech by Charles Munger

• The safest way to get what you want is to deserve what you want.
• I know looking at the people sitting behind the graduates (parents), are the people who really deserve the credit for these graduates today.
• There is no love so right as admiration based love.
• Since 5% of the big ideas in each discipline carry 95% of the freight, it wasn't difficult to pick up a lot of the big ideas in different disciplines. One has to practice the multi-disciplinary approach. I have followed it all my life and it has made my life more fun, more constructive and let me help others, and made me enormously rich. But there are dangers in it and one is that you will sit in front on an expert and you will know a lot more than him, you may cause a lot of offense, I never found a perfect way to counter that and say things without causing offense.
• I knew this young graduate of Harvard Law School and he was a brilliant lawyer, all set to conquer the world and his supervisor called him once and told him "Your duty under any circumstance is to make the client think that he is the smartest person in the room, and if you have any energy or spark left after this, then use it to make your senior partner look like the smartest guy in the room. And only after you have finished these two obligations do you want your light to shine at all." Well, that may be very good advice for rising in a large firm, but it wasn't what I did, I always followed the drift of my own nature and if other people didn't like it, well I didn't need to be adored by everybody.
• Be multi-disciplinary and really understand what you study instead of just spitting it out on the paper, if you incorporate your learning into your mental latticework of thinking then one day you will wake up and it will hit you that you are one of the most confident people in your age cohort, if you don't, then you will never feel confident.
• Many tough problems become easier if you invert. If you want to help India, turn around and ask what you can do not to help India.
• Avoid sloth and unreliability and extreme ideology because it turns your mind into cabbage. For instance preachers on TV, they have a lot of ideas on theology and a lot of their minds are made of cabbage.
• Self pity is very close to paranoia. You do not want to drift into that. Self-pity is not going to improve the situation, and when you avoid it, you'll be better off than practically everyone else.
• Get out of self-serving bias. The world does not revolve around you. A terribly inaccurate way to live. You also want to allow for self-serving bias of others.
• You really want to avoid working under someone you don't admire and don't particularly like. This takes a lot of talent and can be tricky but what I did was that I found people that I did admire and without criticizing anyone, I maneuvered myself to work under them. The outcome will be more satisfaction in life if you work under someone you admire, the alternative is not such a good idea.
• Maximize objectivity. Pay attention to dis-confirming evidence and also checklist routines. Checklist routines avoid a lot of errors.
• Also realized very early that non-legality would work very well in the parts of the world that I wanted to inhabit.
• I often tell the story of Plank and chauffeur. Chauffeur heard Planck's speech so often, one day he requested Planck to let him give the speech and he did. However, someone got up and asked some question and the chauffeur said "That is so elementary, I will let my chauffeur answer that", tossing the question back to Planck.
• In this word there are two kinds of knowledge. First there is the Planck kind of knowledge, people who've really paid their dues and have good understanding and then you have the chauffeur knowledge, who've just learned to prattle the talk and they make hell of an impression, but in the end they just have chauffeur knowledge. I think I've just described practically every politician in the United States. And your task should be to make sure that the control falls into the people with the Planck knowledge and away from the chauffeurs.
• Another thing is intense interest in a subject is indispensable if you are going to excel in a subject.I could force myself to be good in a lot of things. But I couldn't be really good in something unless I had an intense interest, so to some extent you're going to have to follow, ie. if at all possible you want to drift into something in which you have a natural interest. You will be good only if you're really interested in something.
• You also should try and maintain a lot of assiduity. Which means you have to sit on your ass and do it till you succeed. I had very good partners, partly because I deserved them, partly because I picked wisely and some luck. The only commitment we made was that when we were behind on some commitment, we pledged that we would work 14 hours a day both of us till we got the commitment honored. Needless to say, that partnership was very successful.
• Life will have horrible blows, unfair blows. Some people recover and some don't. Every mischance in life is an opportunity to behave well, to learn something, the duty here is not to indulge in self-pity. Famous epitaph : "Here lies Epictetus, a slave, maimed in body, of absolute poverty and favored by the gods."
• All my life I've gone through life anticipating trouble.
• Last thing I want to say to you as you go into the world to practice a profession that puts a lot of procedure , a lot of precautions and a lot of mumbo-jumbo into what it does, is that this is not the highest form that a civilization can reach. The highest form that civilization can reach is a seamless web of deserved trust. No precautions just wholly reliable people trusting each other to do the right thing.
• From Pilgrim's progress: My sword I leave to who can wear it.

Links on Wesco's annual meeting :
Munger Speaks on Berkshire's Success
Notes for Wesco Financial Annual Meeting

Quotes from these :

• Best way to gain wisdom was by "sitting on your (behind) and reading all day."
• It's hard to think of committees that have been successful.
• There is no substitute for a very intense interest.

Also speaks of maximization of objectivity. Had a related discussion on Friday evening with JS. Think that India's most significant hurdle may be getting over patriarchal or feudal mindset towards more objectivity.

Berkshire's 2007 annual meeting links here. From these :

• On Planned Parenthood : Buffett said he believes it is terrific. Says women have had bearing babies forced upon them for years. Men set the rules for years, and he thinks it wonderful that women can make reproductive choices. He said, "I hope you'll respect my opinion as I respect yours."
• On the Dow @13000 : Better get used to these big numbers, to get a 5% return, the Dow will have to be at a million by the end of this century.
• Warren Buffett's only tax advisor is George W. Bush. His annual tax rate last year was 20%. In comparison, he said his employees with income's of US$50k+, pay close to 37%. Forbes 400 richest Americans pay a lower tax rate than their receptionists.
• Still sticks with the 50% return claim for upto $10 million.
• "Read everything you can. By the time I was 10, I read every book in the library that had to do with investing, and many I read twice. You just have to fill up your mind with competing thoughts and then sort them out as to what makes sense over time. And once you've done that, you ought to jump in the water. The earlier you start the better in terms of reading. What I'm doing today at 76 is running things in the same thought pattern that I got from a book at 19. Read, and then on small scale do some of it yourself."
• Will 1973-74 opportunities happen again?When I closed my partnership, the prospective returns going forward I felt was the same as municipal bonds. Don't think that it is the same situation now. If I managed endowment funds, it would be 100% in stocks or long bonds or short bonds, no mix. If I have 20 years and a choice between index funds and 20 year bonds, I would rather buy stocks today.
• Silver : I bought too early, sold too early, and other than that it was a perfect trade.
• What advice do you have for people giving money 40 years from now? As long as you plan to give it back, there is nothing wrong with your time horizon. If you're compounding money at a rate greater than people generally do, you are an endowment for society. Endowments do that to get average returns. You can let someone else take care of the giving now.
• We were talking about an oil company where we read the report and couldn't find the exploration costs in the report. To the extent that it was touched on, was in a dishonest manner. It makes a difference. Annual reports tell you a lot about the honesty of the individual.
• If I were writing something now, I would say if I had to own long bonds or equities, I'd rather have equities, but I would not have high expectations, but above 4.75%

CM mentions Marcus Aurelius here, (a full transcript of the Q&A)

"What one does easily, one does well." -Andrew Carnegie

Just heard the very cool Vint Cerf speak on the future of the Internet. Am I glad to be in engineering :) Felt energized and quite excited again. Was reminded of naive excitement back in school. A cool quote by him was "Power corrupts, and powerpoint corrupts absolutely. So much effort goes into looking right, the content becomes secondary". Apparently, they have interplanetary protocols running now.

Also, ran into L in the parking lot, inspired me to think of switching jobs. I wasn't alone to think there is something wrong in current setup. He echoed a lot of concerns that have been having, received an invite to discuss further anytime.

NYSE short interest ratio is 7.4 apparently. Range is 3.5-7.5. Accordingly, the market rallies on relentlessly. Saw obscene upticks in CMG and MA. ($9 and $14+), both stocks I have owned previously and sold due to valuation considerations ;) Don't have any ideas so still 40% in cash. Iam wondering who these people are, the ones buying so much. Maybe it is smart money after all. Apparently, the last time the Dow declined in 2 of 21 trading days was in 1929.
Of course, I may be just feeling left out ;)

From James Stewart in SmartMoney :

Repeat after me : Markets do not go straight up. I've had to remind people of this in recent years with respect to real estate, oil, and now stocks. The average rally since 1979 has been 50%. But I never buy stocks when the market hits a new all-time high. I don't even like to buy on a day when the market rises. I like to buy into rampant pessimism. I've had to get a very firm grip and remind myself that there will be another correction, or at least a significant buying opportunity, as there was as recently as February. Patience is an underrated virtue in investing. Like most good things, this rally won't last forever.

Found this quote today. Written nicely hence quoted below, did always suspect puritanical strain in self, think that clear logic must be so.

"The notion that a panic should be allowed to pursue its course is perhaps of two strains. One strain takes a certain amount of pleasure, or Schadenfreude, in the trouble visited upon the market, as retribution for excesses of the past; this somewhat puritanical or fundamentalist standpoint rather welcomes hellfire as just dessert. The other sees panic as a thunderstorm, cleaning the air. It purifies the commercial and financial elements, and tends to restore vitality and health, alike conducive to regular trade, sound progress and permanent prosperity." -Charles Kindleberger

A Review of Buffet's Partnership Letters here.

From it :
There is some ambiguity in the statements he makes now and the way that he ran his business back then. He talks about how he never used margin but he actually did. Sometimes he would borrow up to 25%. He also berates fund managers for the fees they charge but his funds charged 25% of anything over 6%. He also had other fee schedules that would charge 1/3 of all profits (with no bogey). These high fees are where he made his original wealth that would allow him to be the largest shareholder of his current company and one of the wealthiest people in the world.

Something off-topic: Read this about the Gnostic Gospels yesterday :

According to the Nag Hammadi Gnostic Gospels, Jesus was just a roving, wise man who preached a life of possession-less wandering and of whole-hearted acceptance of fellow human beings. He preached that self-knowledge is the knowledge of God; the self and the divine are one and the same. The message conveyed was that to know oneself, at the deepest level, was also to know God-that is , by looking within oneself to find the sources of joy, sorrow, love and hate, one would find God.

Hmm, sounds more plausible than immaculate conception etc.. Sign me up.

Have been in India for the past three weeks. Visited the Gandhi Memorial in Pune yesterday. Was very moved by the experience. How did the country go from such selfless idealism to today's corrupt leaders and eroded values? Think India's potential as an "emerging" super-power seems overstated. Think India needs a dictator like Singapore's Lee to bring about the requsite accountability and punishment that are sadly lacking today.

The Cricket World Cup was a source of a lot of excitement upon my arrival here. Now of course, India and Pakistan are out after surprising defeats to two of the weakest teams in the draw. Ofcourse this is not so surprising if these matches are assumed to have been fixed. The Bob Woolmer murder has added another depressing and Kafkaesque angle to the whole affair. As Mark Waugh, an Australian cricketer said "The fixing problems in most of the cricketing world have been solved, except for the sub-continent. Their players still push the envelope".

May sound ironic, but have never been more in love with the country than now. Every visit reinforces my gratitude for having the luck to be born in a family and country where could be free to pursue whatever I wanted.

Portfolio doing fantastic right now. Is up 20% YTD. Too chicken to sell, since hasn't reached target price yet. Hoping for COP to 72+, APC : 45+, WFMI : 55+

From Berkshire Hathaway's 2007 annual report

Some enjoyable and thought provoking excerpts from the 2007 Berkshire annual report:

• There are many giant-company managers that I greatly admire, but I don't think I could do the management job they do. I wouldn't enjoy the duties that came with their positions, meetings, speeches, foreign travel, the charity circuit and governmental relations.
• In our early years we put most of our retained earnings and insurance float into investments in marketable securities, because of this our growth in the early years was high. (27.5%). Later years we focused more on the acquisition of operating businesses hence lower rate in later years (12.5%)
• ISCAR makes money because it enables its customers to make money. There is no better recipe for continued success.
• Paul (of TTI Technologies) rejected the idea of a "strategic" buyer, knowing that in the pursuit of "synergies", he would be apt to dismantle what he had so carefully built, a move that would uproot hundreds of his associates. He also ruled out private equity, which would very likely load the company with debt and then flip it as soon as possible.
• Jack was late. Finally arriving, he explained he had been driving around looking for a parking meter with unexpired time. That was a magic moment. I knew that Jack was my kind of manager.
• Naturally, I had no notion in 1967 that our float would be as large as it is today ($50.9+ billion) . There's much to be said for just putting one foot in front of the other every day.
• Appropriate prices do not guarantee profits, but inappropriate prices most certainly guarantee losses.
• We remain prepared to lose $6 billion in a single event, if we have been paid appropriately for assuming that risk. We
  are not willing, though, to take on even very small exposures at prices that don't reflect our evaluation of loss
  probabilities. Appropriate prices do not guarantee profits, but inappropriate prices most certainly guarantee eventual
  losses. Rates have recently fallen because a flood of capital has entered the super-cat field. We have therefore
  sharply reduced our wind exposures. Our behavior here parallels that which we employ in financial markets: Be fearful
  when others are greedy, and be greedy when others are fearful.
• Once you've flown NetJets, returning to commercial flights is like going back to holding hands.
• You will be happy to hear- and I'm even happier - that this will be my last discussion of the losses at Gen Re's
  derivative operation. When we started to wind this business down, we had 23,218 contracts outstanding, now we have
  197. A Shakespearean thought seems appropriate for the tombstone of this derivative business:
  "All's well that ends"
• As our US trade problems worsen, the probability that the dollar will weaken over time, continues to be high. I
  fervently believe in real trade - the more the better for both us and the word. We had about $1.44 trillion of this
  honest-to-god trade in 2006. But the US also had .76 trillion (6% of GDP) of pseudo-trade - imports for which we
  exchanged no goods or services. Making these purchases that weren't reciprocated by sales, the US necessarily
  transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we
  peeled off a bit of what we owned in order to consume more than we produced.
• The investment income account of our country - positive every year since 1915 - turned negative in 2006.
  Foreigners now earn more on their US investments than we do on our investments abroad.
• All of our direct currency profits we have realized have come from forward contracts, which are
  derivatives, and that we have entered other types of derivatives contracts too. This may seem odd, since you know of
  our expensive experience in unwinding the derivatives book at Gen Re and also have heard me talk of the systemic
  problems that could result from the enormous growth in the use of derivatives. Why, you may wonder, are we fooling around with such potentially toxic material? The answer is that derivatives, just like stocks and bonds, are sometimes
  wildly mispriced. We currently have 62 contracts outstanding. I manage them personally, and they are free of counter-party credit risk. So far, these contracts have worked out well for us, producing pre-tax profits in the hundreds
  of millions of dollars. Though we will experience losses from time-to-time, we are likely to earn - overall - significant profits from mispriced derivatives.
• Picking the right person will not be an easy task. Its not hard, of course, to find smart people, among them individuals who have impressive investment records. But there is more to successful long-term investing than brains
  and performance that has recently been good. Over time the markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of
  successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions. Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I've seen a lot of very smart people who lacked these virtues.
• Board members must be owner-oriented, business-savvy, interested and truly independent and to faithfully represent owners.
• I have been the Typhoid Mary of compensation committees. "All other kids have one" may seem too juvenile
  for use in the boardroom, but consultants employ precisely this argument, phrased more elegantly of course.The consultant's present drill of deftly selecting "peer" companies to compare with will only perpetuate present
  excesses.
• Wall Street's Pied Piper's of Performance will have encouraged the futile hopes of the Gotrocks - above-average
  performance will be promised to them by only paying ever-higher fees.- In part the family persists in this folly because it harbors unrealistic expectations about obtainable returns.
• Let me end this section by telling you about one of the good guys of Wall Street : Walter Schloss. From 56-2002,
  Walter managed a successful investment partnership, from which he took not a dime unless his investors
  made money. Walter did not go to business school, or college. His office contained 1 file cabinet in
  1956, that number had mushroomed to 4 by 2002. He worked without a secretary, book-keeper or clerk, just with
  his son, Edwin. They used only simple statistical
  methods Walter learnt while working for Ben Graham. When asked about their record, they replied : "We try to buy stocks cheap". So much for MPT, TA and complex algorithms.
• Following a strategy that involved no real risk - defined as permanent loss of capital - Walter produced results that
  dramatically surpassed the S&P 500. Still, schools went merrily on their way presenting EMT
  as having the certainty of scripture. Walter meanwhile went on over-performing, his job made easier by the misguided
  instructions. Maybe it was a good thing for his investors that Walter did not
  go to college.
• Last year, one hapless soul asked Charlie what he should do if he didn't enjoy the book (Poor Charlie;s Almanack),
  back came a Mungerism " No problem, just give it to someone more intelligent". Other books are : "Seeking Wisdom
  : From Darwin to Munger" by Peter Bevelin and Fred Schwed's classic : "Where are the Customer's yachts?". The funniest book ever written about investing, it lightly
  delivers many truly important messages on the subject.
• Charlie and I are extraordinarily lucky. We were born in America, had terrific parents who saw that we got good
  educations; have enjoyed wonderful families and great health; and came equipped with a business gene that has
  allowed us to prosper in a manner hugely disproportionate to other people who contribute as much or more to our
  society's well-being. Moreover we have jobs we love, in which we are helped every day in countless ways by talented
  ad cheerful associates. No wonder we tap-dance to work.

Bill Miller interview excerpts

...as I'm fond of telling the analysts, if it's in the newspapers, it's in the price. So you really need to understand what isn't in the price, what isn't being discounted, what events can happen that will lead the market to think differently...

...If gasoline prices go up, you're going to drive less. So price and demand are inversely correlated: basic economics..But in financial markets, it isn't the case. Here, demand is positively correlated with price. More people buy things when they go up; if stocks start to go up, more people want them than if they're going down. The higher they go up, the greater the demand for them.... financial assets particularly - it's been very well established that demand follows price....

Entire interview here.

Planning to read Fortune’s Formula by Bill Poundstone soon.

• The task is not to see what lies dimly in the distance, but to do what lies clearly at hand - Thomas Carlyle
• Necessity never made a good bargain - Benjamin F
• Acquire worldly wisdom and do what you think is right. If that gives you temporary unpopularity with your peer group, then to hell with them - Charles M
• The ones who matter don't mind, and the ones that mind don't matter. - (unbelievably, Dr Seuss)
  
  Reading the Almanack again, as a bad day in the market. Rushing to work now to do what lies at hand, loath to leave the tulips though.

Good interview with WEB.

From James Stewart, Common Sense, some good rules to live by :

-When the market falls and stock values decline, focus on buying rather than the current value. When favorite stock falls in price, most paralyzed. Phenomenon not limited to neophytes. Ibankers seem comfortable spending billions only when high prices. e.g. M&A pick up during market peaks.
-Remember that stock represents fractional ownership in an ongoing enterprise.

Interesting Barron's section this week. Round-table II. After the scolding last week, they left us 2 copies of the paper this morning, guess am shrewish after all ;) Also signed up for brokeragelink at Fidelity. Might as well manage retirement funds as well. Have a couple of good ideas for those funds. Advising T to buy VGENX and fuggedaboutit for 1 year. Also thinking of going to Omaha this year for the annual meeting, may be fun.

Need to do some regular work today. Lagging pitifully behind on that. Atleast it provides the steady, if unspectacular steady-state and gives me something to do during the day.

Nice Quote :"The happiest conversation is one where there is no competition, no vanity, but a calm interchange of sentiments". - Samuel Johnson

"Be extremely skeptical, and stay with what you know. The great success stories in life are people who figure out what they know, stay with it, put their eggs in that basket and watch it very carefully. Don't listen to me or anybody else." - Jim Rogers


The stock market is the only place where customers will run away from a bargain. Someone once said that and it remains true. I did some buying this afternoon - nothing very big, but nevertheless, I'm putting money to work. I think that attention will blow over shortly. The market's concentration span is quite limited, so while it may be the key focus now, next week it won't be. In a few days we'll all be focused on something else.

Always Be An Early Seller
Don't worry about leaving some money on the table. As the saying goes on Wall Street - the only person who always buys at the bottom and sells at the top is a liar.

When To Sell Winners

When To Sell Winners
Professionals sell stocks only when the reasons they bought them are no longer valid. e.g a stock selected because it was undervalued is considered ripe for selling when it reaches "a reasonable valuation." Start with the stock's fundamentals, its P/E, P/S ratio, book value, and cash flow. Is it more expensive than its peers? If you're still the least bit bullish, it's probably too early to sell. The bottom line is that you have to always ask yourself why you bought a particular stock in the first place and if that reason is no longer valid, then it may be time to move on.

Another one : would you buy it again at this price? If answer is no, SELL!! and RUN!!

Some Munger pearls

Found these today.. ----- IT PAYS TO BUY QUALITY: Munger persuaded Buffett to embark on the new investment strategy with the 1972 acquisition of South San Francisco's See's Candies for $25 million -- a tiny fraction of what it's worth today. "See's candy company was the first high-quality business we ever bought," he observed. See's also demonstrated to the value of building a "seamless web of trust" between a company and its customers and suppliers, he said in making the point that doing the right thing can pay big dividends both personally and professionally. One has to have a lot of patience in waiting for the right investment opportunities to come along, and similar patience and selectivity can be useful in one's personal life as well, Munger said. "When you have doubts about a person, you can pass," he said. "There's enough nice people to interface with." Other observations Munger shared: • Strategic plans prompt people to do something when sometimes the best course of action is no action. "Strategic plans cause more dumb decisions than anything else in America." • Their mistakes tended to be "great losses of omission. "If we had invested in McDonald's in its infancy ..." he ruminated. Berkshire recently acquired a significant stake in the nation's largest restaurant chain. • Know your limits. "A money manager with an IQ of 160 and thinks it's 180 will kill you," he said. "Going with a money manager with an IQ of 130 who thinks its 125 could serve you well."