I was cheered to note that AMR held up better than the rest of the market today. Market darlings AAPL, CMG, MA, RIMM etc fell quite a bit.. Is the market finally getting a bit rational or will they just resume their relentless march higher ?

Ended 2007 with a 38.9% gain. Quite a comedown from earlier return because of AMR.
Better than s&p and dow anyway, also higher than last year.

So far am doing investment based on psychological factors, need to do more on financials than just psychology!

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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.