Always Yield to Individual Opportunities

In Howard Marks most recent Chairman memo, he remarks intensively about his disdain for investment generaliztions. He certainly is not wrong in his thinking because some of the biggest hazards (e.g. Long-Term Capital Management and the usual concepts behind most quant funds) come from generalizations.

There's little I hate more than investment generaliztions. For years, for example, self-styled authorities on the high yield bond market would say "bond defaults typically tae place 2-3 years after issuance." That always set my teeth on edge.

As he explains his viewpoints, the equity risk premium, brought up by FierceFinance that sparked the memo, gets the full brunt of what he believes is wrong with how equity risk premium is used. It may seem petty to harps on the article's present tense use of the term, as written in the corresponding online article in Pensions & Investments:

The long-term equity risk premium is typically between 4.5% and 5%.

How does one sentence gain such attention to spark a nine page assault?

The memo is a great read to gain better perspective in thinking about markets going forward. He brings a far more appropriate line of thinking in assessing markets by using earnings yield or the inverse property of the infamous price to earnings ratio, P/E. 

I have tried to use it in a similar fashion when assessing Lender Process Services Inc., $LPS, when it seemed to be destined for failure and written off by most. Howard Mark's memo has been a good reminder of what perspectives to hold when valuations, broadly speaking, gradually becomes richer with time.

Here is the memeo by Howard Marks: The Outlook for Equities

2009 interview w/ Cathy Baron Tamraz: PYMNTS.com Launch

CATHY BARON TAMRAZ: Greetings from San Diego, where we have just completed the Fortune Most Powerful Women’s Summit. I am Cathy Baron Tamraz, CEO of Business Wire, and I am here with the only male that is allowed into this conference and that is Warren Buffett, Chairman of Berkshire Hathaway, which is also the parent company of Business Wire. Warren has graciously agreed to answer some questions today, and kick off a conference that Business Wire and Market Platform Dynamics are holding in New York City, to launch a new Web site about the payment industry callexd PYMNTS.com. We are really excited about this new portal, which will be a primary source of news for the payments industry. It will havebreaking news and regulatory news in the payment industry, new technology and new products.

Because the payment industry is so vital to the economy, we thought it would be relevant to talk to Warren and hear his views on the state of the economy and what we can do to revitalize it. So thank you, Warren, for speaking with us today and agreeing to be interviewed by me.

WARREN BUFFETT: You are my favorite interviewer!

CBT: Thank you very much. That’s on tape, by the way. So, the first question I have for you is about the near-term future of our economy. The last 12 months feels like a really bad dream. This year has been the year that shook the world. It’s been a year since the bankruptcy of Lehman Brothers and it almost sent the economy over a cliff. We had the Bear Stearns fallout, Merrill Lynch sold to Bank of America, the AIG crisis, Fannie and Freddie falling under government control. It’s been a really difficult year. So, what do you think is going to happen now in the fourth quarter of 2009 and also in 2010?

WB: I am not sure about exact quarters or anything of the sort. Who knows about next week or next month? We made enormous progress since a year ago. We had a real panic. And if you didn’t panic, you didn’t understand what was going on. What happened in September and October of 2008 will particularly be remembered for a long, long time. And while the governmental authorities malign things sometimes, they fortunately did some very right things, very important things. They did them properly, and they kept us from going over the cliff. The fallout from that financial panic hit the regular economy in the fourth quarter like a ton of bricks. We are coming back from that. The patient really went into the emergency room and it won’t come out of the hospital entirely for a while.

There are things that have to be cured in the system, but this system works. If you look at this country, we have gone through the Great Depression, we have gone through world wars, we have gone through civil war, and we have progressed like no country in the world. We have the right system. It doesn’t avoid all the problems, but it overcomes all the problems.

CBT: Do you see consumer-spending increasing in the near term?

WB: No, and not for a while. I think people had an experience a year ago that they are not going to get over quickly. But the factories are there, the human potential is there, the system is there. It works over time. Your kids will live better than you and I live, and our grandchildren will live better than they do. This country moves forward.

If you take the 20th century, we had a Great Depression, world wars, a nuclear bomb, a flu epidemic. We had all these things, and at the end of the 20th century, the average American was living seven times better than at the start of the century. It’s amazing. The Dow Jones Average had gone from 66 to 11,400. So the country works, you don’t have to worry about that.

CBT: This latest debacle has also been called a “crisis of confidence.” Five trillion dollars of American wealth has vanished. If confidence is what’s needed to stimulate the economy, how do we put trust back into the financial system? Does the government need to retain a stronger hand?

WB: Well, people became afraid a year ago, and confidence is not going to exist when fear exists. Fear is very contagious. It spreads very quickly, and that’s what happened in the start of the fourth quarter last year. The confidence doesn’t come back as fast as it’s lost, but it does come back. It’s come back a long way already, but it has a ways to go. As people see and really get re‑affirmed about the fact that this system works. We are still tossing out 14 trillion worth of product a year. It will return. It’s already returned with most people in most ways, but it’s not back 100%. It’ll get there.

CBT: Do you have any comment on the unemployment rate?

WB: Well, the unemployment rate will turn around late. It always lags. People who have gone through a period like this are slow to rehire until they really have to. On the other hand, the time will come when they have to. There will be more people working in housing a year or two from now. We have a brick company. We have companies in the carpet business. We have had to let people go in those businesses in the last year, year and a half. We will be adding people at some point, but we won’t do it until we see the demand come back. It’ll be a little slow because we don’t want to go through what we did before. Although, I will guarantee you that three years from now, our brick companies, our carpet company, and our insulation company will all be employing far more people than now.

CBT: That’s good to hear. The next question is about the government. Congress and the administration have been working on reforming financial regulation. Do you think they are on the right track? And will reforms and new rules to protect consumers help restore confidence?

WB: Well, the new rules won out, so the things they have done during the last year fell pretty short of confidence. Not everything is done perfectly, but nobody can do them perfectly. The important thing is that they got things done and people do believe in them, and they’ll believe in them more and more as it goes along. Government has a real role to play and it will not prevent bubbles forever. Human beings do crazy things from time to time, and the real question is how they recover from it. You and I have done things in our life, and the truth is that we came back from them. That’s the important thing.

You can’t rule out human emotions. When people get greedy as a pack, strange things happen. When they get fearful as a pack, strange things happen. That isn’t the way they exist most of the time, but they do give into that. So rules will help us avoid some of the problems. They’ll help us modify some of the problems, but they won’t eliminate all future problems.

CBT: I was watching a little TV this week and I was listening to William Cohen, who is the author of “The House of Cards.” He said that if you don’t change compensation and how Wall Street is incented, the same thing is going happen all over again. And yet, I recently heard that Wall Street is hiring, and they are also guaranteeing big bonuses and compensation packages, which is a little bit alarming if you ask me. What’s your view is on that?

WB: Well, Wall Street is about trying to make a lot of money. It’s the nature of the system. You get a huge capitalist system, and it raises lots of money and it makes lots of big deals and people – some people get paid very well for it. What you have to change in Wall Street is you have to make sure that in addition to carrots, there are sticks. And it can’t be a one‑way street where they are making ungodly amounts of money when things are good and then they move on to someplace else for a while when things are bad. You have to create a downside. I hope there are some practices put into place – and I’ll have a few thoughts on them myself – but Congress undoubtedly will have a few thoughts too. You have to put in something where there is downside to people who really mess up large institutions and we need some new help in that. Too many people have walked away from the troubles they have created for society, not just for their own institution, and they have walked away rich. They may not be as rich as they were before, but they have walked away better than they should have. There have to be incentives – not only to get rich, but to behave well.

CBT: President Obama said this week that the financial firms “owe a debt to the American people.” And I wasn’t exactly sure how, how they could pay that back to the American people.

WB: It’s interesting. Exactly a year ago when I was at this conference, I had a proposal for the so‑called “toxic assets.” I called three people in the financial world who were going to write Secretary Paulson about it. I wrote them on October 6th. I called three people to help out on this, and it would have required a lot of effort on their part and some commitment of money and time and energy. I asked all three of them if this went forward to do it absolutely pro‑bono. I asked them not to make one dime out of it. And they all said yes to me. So, they are good people. Many are motivated by greed. None of us are perfect, you know? I always say that, “Every saint has a past, every sinner has a future.” We have got some sinners back there, but they are not all bad. They went along with a bubble that they helped create – but the whole American public did. You still have to have the right rewards and penalties for behavior. That’s how you get decent behavior. So, I don’t look at Wall Street as “evil.” I look at Wall Street as given to huge excess sometimes. I don’t want to get rid of it. We need something to allocate capital and distribute securities and all of that throughout the system. We have got a big capitalist system and we have to have a big capital market – but there is plenty of room for improvement.

CBT: Looking into your crystal ball, what will the stock market look like a year from now?

WB: Well, I don’t know about a year from now. Five years from now, it’ll be higher, yeah. Ten years from now, it’ll be higher. One year from now, I don’t know.

CBT: Fair enough. Moving a little bit more closely to the payment and card system. On September 3rd, the The Wall Street Journal had an articled titled “Wal‑Mart to Pay via Check Cards.” Wal‑Mart isn’t going to issue paychecks anymore. So it’s all going to be through a card system, which is actually good for the payment industry and the card industry. And it seems to be a growing movement to use cards to dispense payments. I noticed that on some airlines, if you don’t have a card – a credit card of some kind – you can’t eat or drink anything if you are sitting in economy because they don’t take cash anymore. So that, that’s kind of interesting…

WB: Some restaurant just announced that in New York too, that they weren’t going to take cash.

CBT: That brings us to the next question: Do you think cash is ever going to disappear as a form of payment?

WB: It won’t disappear, but in the end – and that’s the genius of the American system – we do give the consumer what they want. If people want to use the convenience of cards, they will do it. Now there will be enough people that want to use cash, so consumers won’t turn their back on it entirely. They haven’t given up landline phones entirely for cell phones. The American consumer – in the end – is king. You can push them around for a week or a month maybe, but you either figure out what’s in your customers’ mind and decide you are going to serve them; or you are not going to be in business. They are right, and you are wrong. It’s what made this country, to some extent, what it is. Our market system where the customer – 300 million Americans – tell people what to make, where to serve them, and how to do business. Compare that to some totalitarian system, where somebody decides what people are going eat for lunch and we win.

CBT: Well, we are certainly not used to that…

WB: Oh yeah. Mm‑hmm.

CBT: The credit card industry is about 50 years old, and it’s pretty safe to say that it’s going to transform in the next 10 or 15 years. Sometimes I think we’ll have chips in our hands to scan and pay for things. All kinds of things will be transacted electronically.

WB: Cathy, I met Ralph Schneider who was the founder of the Diners Club back in the 1950s. He had just designed an IRA, and they are just using it around New York. They used to charge the merchants 10 percent and the card was very low priced then. American Express went into the business originally defensively. They had the Travelers Check and they were worried about what the credit card would do to it. In 1964, when American Express had what they called the great Salad Oil Scandal, we became this little outfit in Omaha and became the largest shareholders of the American Express Company. I went around to restaurants and service stations, and asked people about whether the Card was losing its appeal because of the scandal that was going around. They said the Card wasn’t losing it but that it was growing in appeal. So, I watched the credit card industry almost from the beginning in that respect. We got in early. I could see it was a powerful tool. First Data was in Omaha, and I have watched them all. Carte Blanche, the Hilton Card – some of those have disappeared over the years. Of course, Visa and MasterCard have been successful. There have been all kinds of developments, but the truth is, the American public likes to be able to go into their pocket and pull out a card.

CBT: Well, that was a really great lead into a question I had about American Express. Everyone knows here that Berkshire Hathaway has an investment in American Express, as you just said. So, you obviously know a lot about the payment industry and that company in particular. Can you tell us what attracted you to that company?

WB: Well, what originally attracted me back in 1964 was that Diners Club got the jump. They were way ahead of American Express. American Express came in with a very interesting market and concept. People already were carrying Diners Club, and American Express wanted to enter the field. They charged more than Diners Club did for their product. Diners Club had this card that had a bunch of flashy little symbols and everything on it. American Express brought out that centurion, and originally it was the green card with the guy that looked like Mr. Integrity. If you went into a restaurant, and you were buying dinner for somebody, and you had a choice of pulling out this Diners Club card that looked like you were giving a check from your mother or pulling out this centurion that made it look you were J.P. Morgan or something – you went with Mr. Integrity. They actually took over the field by establishing themselves not as the low‑priced competitor but, but as the class competitor. It was a great marketing arrangement. Then it swept the country. The card I carry in my pocket says, “Member Since 1964.”

CBT: Mine says “Member Since 1983.”

WB: Well, that was the year you were born, I was 40 years old or something when I did this.

CBT: Last question. We would like you to impart a little bit of advice and tell us what is the one lesson that we should take away from this economic Pearl Harbor?

WB: Well, I think that it goes back what I have told my manager to do: Just keep taking care of the customer. We have got a lot of customers in this country. Since 1886, Coca‑Cola has been selling a product that people like, and they just keep taking care of them. It’s what you have done at Business Wire. In the end, nobody that’s ever taken good care of the customer has ever lost; I mean, that, that is the name of the game.

CBT: That is great advice. I want to thank you for your time, Warren, it’s been a pleasure talking to you, and allowing me to interview you.

WB: It's been fun. Thanks, Cathy.

Fireside Chat w/ Warren Buffett & CEO Cathy Baron Tamraz

@ PYMNTS.com interview w/ Warren Buffett 2013

CEO of Business Wire, Cathy Baron Tamraz:
Good Morning,
I am Cathy Baron Tamraz, CEO of Business Wire and I am here today, February 26, 2013 with Warren Buffett, a man who needs no introduction. This is Warren's second interview for PYMNTS.com. We did the first one in the fall of 2009 around the time the site launched. The site has become the de facto destination for all important news and innovation around the payments industry and since money is Warren's sweet spot, his insights are a perfect kickoff to the innovation project. So let's begin, Good Morning Warren.

CEO of Berkshire Hathaway, Warren Buffett:
Thanks for having me.

CEO of Business Wire, Cathy Baron Tamraz:
It's good to see you as always. We have certainly come a long ways since we have spoken since the fall of 2009, when we were in...

A Word about Discounts and Expected Values

I left my comments on Whopper Investments. Any discussion about this topic has always caught my attention. I still grapple with the ideas put forth by different people but have come around to my own comfortable conclusions.

Someone posted a comment that basically said (and I’m changing the words a bit): :I disagree. I use discount rates to adjust for risk. If you were to offer me the choice of a guaranteed $1 or a 50% chance of $2 vs. a 50% of zero, I would take the guarantee every time. I need to use discount rates to adjust for that.”

This is faulty thinking. Remember, this is a stock market offering multiple choices for investment. If something with an expected value of $1 coming from a 50% chance of zero and..

My comments in response:

Owen says:March 18, 2013 at 4:13 pmIn the context of generating profits for the risks taken, we are entering murky waters This is a good discussion on risk versus discounts but it is similar to how investor categorize their investment strategy as growth or value investing, they are joined at the hips. With the matter of expected values and discounts we have to consider timing as a key element. You have to tie in the risk/reward analysis and geo-expected(annualized) returns to make an investment worth the trip. Is the invest worth the risk and time given our “current” rational expectations? Discounting should be used more for assessing versus risk-adjusting expected returns.In terms of Kelly, you have a strategy that avoids gambler’s ruin should worse cases materialize, given a large sample space of bets.Cash flow projection another story: Amazon’s cash flow year end 2000 vs Washington Post cash flow 2000. It is better to be opportunistic in your approach than cash flow sensitive in projections.Good investing,Owen.

Bill Miller Interview with Bloomberg

2013 Starts Out Strong for Investments

REITs Dominate Strong Investment Climate

By John Salustri | National

NEW YORK CITY-Call it the day of the REIT. And it looks like the day of distress is largely over. Those were some of the thoughts Real Capital Analytics chief Bob Whiteshared with us in an exclusive interview on the heels of the locally based firm’s release of its monthly US Capital Trends.

Make no mistake, the distress is still out there, but ...

Simple money management wins over time

By Joseph Stuber

The difference between a successful trader and a losing trader has a lot less to do with the successful trader’s ability to pick winners than you might think. All traders are going to experience losers and lots of them. It’s a fact of the business.
 

How much trading capital is enough?

By Joseph Stuber

You have heard it before: Trade structure and money management are the most important components of a profitable trading strategy (see “Simple money management wins over time,” January 2012), and while you can’t dismiss the role played by entry and exit logic, order triggers are significantly overrated as the key contributor to profitable long-term results.

Surveys suggest that professional traders are successful about ....