This stretches from August 2010 to October 2010:
On the value of credit analysts.
On price discovery in dealer markets, and auctions gone wrong. I never knew that I could haggle so well.
On the vagaries of bulge-bracket brokers, and how a good reputation helps on Wall Street.
On how we almost did a CDO, and how it fell apart. Also, how to make money in the bond market when you reach the risk limits.
On my biggest mistakes in managing bonds. Also, on aggressive life insurance managements.
On bond technical analysis, and how to deal with a rapidly growing client. Also, the end of my time as a bond manager, and the parties that came as a result. Oh, and putting your subordinates first.
The problems with the Fed’s seemingly “free lunch”strategy. Pushes up asset prices and commodity prices, benefiting the rich versus the poor.
Shows what US states have diversified vs concentrated economies by sector, and what states dominate each sector.
Industries are under-analyzed, relative to the market on the whole, and relative to individual companies. Spend time trying to find good companies with strong balance sheets in industries with lousy pricing power, and cheap companies in good industries, where the trends are not fully discounted.
Purchase equities that are cheap relative to other names in the industry. Depending on the industry, this can mean low P/E, low P/B, low P/S, low P/CFO, low P/FCF, or low EV/EBITDA.
Stick with higher quality companies for a given industry.
Purchase companies appropriately sized to serve their market niches.
Analyze financial statements to avoid companies that misuse generally accepted accounting principles and overstate earnings.
Analyze the use of cash flow by management, to avoid companies that invest or buy back their stock when it dilutes value, and purchase those that enhance value through intelligent buybacks and investment.
Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.
Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.
How the portfolio rules work together to create a “margin of safety.”
When rules become known and acted upon, the system changes to incorporate them, making them temporarily useless, until they are forgotten again.
When a single strategy becomes dominant, it can become temporarily self-reinforcing. Eventually, it will become self-reinforcing on the negative side.
A healthy market ecology has multiple strategies that are working in separate areas at the same time.
There is room for a new risk model based on the idea that risk is unique among individuals, and inversely related to the price paid for an asset. If a risk control model has an asset becoming more risky when prices fall, it is wrong.
In the end, economic systems work, and judicial systems modify to accommodate that. The only exception to that is when a culture is dying.
Illiquidity is an underrated risk. Most financial company failures are due to illiquidity, which usually takes the form of too many illiquid assets and liquid liabilities. Adding to the difficulty is that it is generally difficult to price illiquid assets, because they don’t trade often.
If we could turn back the clock 65 or so years and set up a more conservative method of accounting for pension liabilities, we would be much better off today.
This piece won a small prize, and in turn, I received three speaking engagements.
People care more about fairness than improving their own economic/social position.
Earnings estimates have their problems, but they exist to give us a flawed method of estimating the future performance of companies.
That’s all for now. Never thought I would do so many long series when I started blogging.