All good investment decision-making is forward looking.  Whether you are buying or selling, it doesn’t matter where prices have been in the past.

Now, that said, price and volume charts may occasionally indicate where there is support or resistance.  That might be worthy of consideration in the short-run.  When I was an institutional bond manager, competing against few others, but larger others, that was more important.  Not sure it is so important when competitors are smaller.

My main concern is that investors focus forward.  Use your best data. and estimate future advantage.  Be aware of mean reversion, so don’t let mere changes in price affect your opinion.  Always aim for the best possible future return.

We win and lose constantly in the market.  Don’t let past successes delude you, they may be historical accidents. Instead, focus forward to try to see what opportunities and threats are in front of you.

There were two hard things I had to learn when I was a corporate bond manager: 1) learning to sell lower than my original sell. 2) Learning to buy higher than my original buy.  That meant I had to forget my original cost basis, and try to estimate the best forward value that I could.

That is a tough place to be, but it is rational.  Always look forward, and estimate where you will have the best outcomes going forward.  You will get superior results from doing that.

I get good questions from readers.  Here’s one from this post:

Is there a reason why life reinsurance companies are better positioned then life insurers?

Don’t they face the same problems that they won’t be able to generate as they roll their portfolios into lower yielding bonds going forward (since rates have come down so much)?

Basically just wondering why you think RGA is cheap at 84% of AOCI adjusted book but not the rest of the life insurance industry at 35%-75% of tangible book?

Is it mostly due to your opinion of management?

I started to leave a reply and the normally reliable software glitched, and I lost it. Dejected, I decided to make it a post.

First, life reinsurance is much less competitive than life insurance.  Globally and in the US, the top 5 life reinsurers have ~80% of the market share.  Life insurance is far more fragmented, and has a decent slug of mutual insurers who don’t have an explicit profit motive.  (Note: many of the large mutuals are exceedingly well run, which makes the competition even stiffer.

Second, life reinsurance is mostly mortality exposure-based, versus life insurers which are mostly investment spread based.  The law of large numbers favors the life reinsurers over the insurers.  Low interest rates will not affect reinsurers as much as insurers.  Hint to those who analyze life insurers and reinsurers: look in the statutory statements, which have a lot more data than the GAAP statements for odd reserves that indicate a significant chance of losses if interest rates continue to remain low.

Third, life insurers have weaknesses in reserving practices for variable products with secondary guarantees.  There is no good way to calculate what a proper reserve should be.  The implied options are odd, and have no natural hedges.

That’s why I only own one life insurance company; one that has simple products.  Aside from low interest rates, valuations are low at life insurers because of lack of certainty over reserves.

So, much as I like RGA management, they are not the main reason why I like the company.  RGA executes well, and has an excellent reputation in its industry.

Here’s another question that I received via e-mail:

Prices of financial services stocks are too cheap for me to resist these days.  I see companies like Citigroup as being just given away by Mr. Market.

 Within insurance, my equity exposure is limited to AIG, which I consider to be well managed, misunderstood, and priced attractively enough to continue holding.  Over the past month other insurers have started to grab my attention (HIG, MFC, MET, PRU).  HIG stands out as being the least sensitive to the possibility of a decade of financial repression.  Do you have any favorites that you would care to share?  This topic could make for a timely blog posting.

I responded:

Value trap.  Focus on sustainable ROEs that will validate book value.  The accounting of AIG is a quagmire, even after their disposals.

There is a further difficulty with life insurers at present.  The GAAP accounting standards do not fairly reserve for secondary guarantees on insurance and annuity policies; truth, as a life actuary and a financial analyst, the options offered are so complex and long-dated, that I’m not sure there is a way to value them.  Over the last 10-20 years, we knew that this could be an issue, but we are now seeing the issue creep in as stock performance ebbs.

But if you disagree, consider PNX, it has all of the issues, and then some.  Be sure to get the Statutory books of the companies you buy here, because that drives dividend payments to the indebted holding company.

And one more e-mail:

Hi David,   I have enjoyed reading your blog for many years (even before GGG recommended it)

I have two questions for you about insurance companies in general — I know you are very busy, I am just hoping you can point me to some websites where I can do my own homework.

(1) If I want to check the financials of a number of mutual insurance companies, is there a consolidated source?   Do I need to pull the annual statements of each one and are the different state accounting rules comparable?

(2) As I understand it (and I am quite new to this so I may have this wrong) — mutual insurance companies use “statutory accounting”, which is different from US GAAP.    Is there a website or library book that explains the differences between these two methods?     Does statutory accounting differ from state to state?

Again, I am sure you are very busy and I will have to do my own research / homework.  You seem to be more knowledgeable than most about insurance accounting, and I am hoping you can point me to some documentation that will help me gain a better understanding.

My response:

1a)  Consolidated source: , but most companies will send it to you if you ask.  Haven’t been turned down yet, aside from Berkshire Hathaway… and I’m working on that.

1b) Generally, you have to pull each one.  Some companies will do a combined set of schedules for their investments.  When I got AIG 3 years ago, there were 60+ books…

1c) There are slight differences by state, but most of the time you can neglect that.

2a) Mutual companies use statutory accounting, but so do stock companies for the state’s analysis of insurance subsidiary solvency.  And, though stock companies use GAAP for reporting to shareholders, many mutual companies will have an internal pseudo-GAAP basis for analyzing long-term profitability, and for management bonuses, yeh.  Statutory accounting is in some ways more critical than GAAP even for stock companies, because that determines how much cash can be distributed to the holding company, which is crucial if the holding company needs to make interest payments, or wants to make dividend payments.  This is one reason why actuaries often price products by calculating marginal distributable earnings.

2b) I have attached what I think is a short primer on GAAP vs Stat accounting.  This is a big topic, and the NAIC sells all manner of resources at high prices with all of the gory details.  This should give you a good start.  I general, the volunteers from the actuarial societies put out some good summary stuff, but you have to hunt for it.

Keep fighting the good fight.  Bloggers are the conscience of Wall Street and DC…


Life insurance is tough because there is uncertainty on claim payment on timing, and uncertainty of investment earnings.  The latter is usually more serious, because the law of large numbers does not help.  Add in the valuation issues, and now you know why a life actuary primarily invests in P&C insurance companies, life reinsurers, and simple life companies.

Full disclosure: long RGA

Missing earnings estimates hurts in the short run, but it doesn’t mean much if there is no indication that the overall earnings trend has changed.  If the overall trend in earnings has turned down watch out.  Prices can fall as for Zynga and Facebook.

Then you have something like Reinsurance Group of America [RGA].  It recently missed earnings by 12 cents. $1.77 expected, $1.65 actual.  You should want your companies to miss estimates every now and then.  It raises the probability that the accounting is honest.  With a company like RGA, earnings comes down to how many/few large value life insurance policy deaths they have in a quarter.  You are subject to the “law of small numbers” even with the second largest life reinsurance block in the world, because it is the big policies that matter.

Even this does not qualify as a bad quarter for RGA.  Can’t remember a time when they lost money, but they have missed by far more.  Often I have bought shares on such a day; I did not get any on the brief lousy open after the earnings announcement.

With RGA, I hope the price goes down.  I will buy more.  Why?

  • It rarely misses earnings.  The company is conservative with guidance, and usually beats.  Cumulatively, over 2 years it always beats.
  • Life Reinsurance is an oligopoly.  It is one of the less competitive areas of the insurance industry.
  • It is valued at less than 8x current earnings, which are expected to grow, and less than book value, and even book value less AOCI.
  • You have actuaries running the place.  Actuaries have an ethics code.  I’ve met the management; talked with them on the phone.  Occasionally been on their conference calls.  They seem honest and competent.  I have worked for dishonest and/or incompetent insurance management teams occasionally.  I know what they feel like.  One thing dishonest insurers do is always make earnings by shorting reserves, and then, when the reserving imbalance is too great, deliver a lollapalooza of a bad quarter which more than erases the seeming excess earnings.

That RGA would deliver a slight miss is encouraging to me.  The accounting is honest.  RGA is the #2 or #1 firm globally in what it does.  Unlike the deceased Scottish Re, it was conservative in M&A.  It let Scottish Re overpay for deals, while it sat back and saw an undercapitalized competitor cobble together a life reinsurance block nearly as large, but one that was unprofitable, because of the high prices paid to get it, and the opaque holding company structure (worthy of AIG in miniature).

More generally, when a company misses earnings:

  • Does it revise current guidance?  If it doesn’t it may be temporary, and a fluke of accounting rules.  Look at the accruals to give you a clue.
  • How are industry dynamics?  If everyone is missing estimates, there is a reason to mark future prospects down.
  • Analyze where companies in similar industries have been taken private.  That serves as a ground floor for where valuations could go.

And with that, I leave you with RGA.  I have argued for years that Buffett should buy it.  Excellent company, does not need guidance.  Could take over his inferior #5 position in life reinsurance which has lost money and become #1 … and then the life reinsurance industry will have no more pure plays.  Kind of sad, but logical, because larger P&C reinsurers benefit from the diversification.

So RGA missed earnings.  Who cares?  A little lower and I load the boat.

Full disclosure: long RGA

This is a good book and I recommend it to certain people.  Thus when you see the number of stars I give it at Amazon, know that for those whom the book is good, it is really good.  But there are some who will get less out of the book.

The author, David Wilson, is an excellent explainer of markets to those who are just learning.  He frequently does “The Chart of the Day” at Bloomberg, giving considerable insight to neophytes and professionals as he boils down complex topics into one graph.

As I began to read the book, I noted to myself, “Oh, in a number of places, they are using Bloomberg Terminal formats without mentioning it.  At the end of the book, they give a list of Bloomberg Terminal codes that would be useful to those who subscribe to the ~$2,000/month service. (Yeh, it costs that much, and it is worth it if you can afford/use it.)

I say this partly because I was a rare Bloomberg user that had expertise with all of the “yellow keys” of Bloomberg.  I’m intellectually curious, so when I first used a Bloomberg terminal back in late 1992, I played around with it to see what it could deliver.  It could deliver a lot, and it has expanded exponentially since then.  It is one amazing system.

But what if you could cobble together the most important 50% of what you get on a Bloomberg terminal, ad pay nothing?  That’s me.  It takes extra work, but you can do it.  I miss my Bloomberg terminal, because I can’t afford it now, but for those that can afford it, it is a wealth of information.

Thus, back to the book.  The book reads like one who imbibes both Bloomberg’s editorial ideals: “keep it simple. explain, give them the facts,” and teaching beginner users of a Bloomberg terminal on how to think about the markets.  Note that the terminal never gets mentioned until an appendix at the end.  But those that use a Bloomberg terminal to a high degree understand how the market is segmented.  We don’t ask the same questions with municipal bonds as we do with stocks.

This book is a very good book for beginners in the markets.  It explains a lot of things well, with reasonable detail.  It is not a good book for experts — you know all this, but if you want to get an introduction to some tangential areas you might not know, this could still help you.  This book brings you up to an intelligent beginner level in a wide number of areas.

What areas does it cover:

  • Stocks
  • Bonds (of many sorts — corporate, government, municipal, mortgage, etc.)
  • Money markets
  • Indexes
  • Commodities
  • Derivatives (options, swaps, futures, forwards)
  • Mutual Funds (open-end and ETFs)

The book highlights at the edges of its pages the main ideas, processes for using the information described, and definitions of financial terms.


When the book gives definitions, it is white on a vivid green background, and is hard to read.  The text should have been black against the vivid green.

The book implicitly assumes that people get quotes from a Bloomberg terminal.  Aside from professionals, few people do.  Until Bloomberg markets a retail service for individuals, offering the basics for 5% of the cost, there is little utility from explaining the nuances of a Bloomberg quote.

The title is slightly misleading, because the the book is no more “visual” than most.  There are a decent amount of graphs, but for a book that calls itself visual, I would have expected more.

Who would benefit from this book:   This book is best for those that have access to a Bloomberg terminal, but are not expert in using it. Second best, it could help those without a Bloomberg terminal, but want to learn the basics of investing.  Dave is a good teacher.  Finally, for those with experience, this book is redundant.  If you want to, you can buy it here: Visual Guide to Financial Markets (Bloomberg Financial).

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.




  • Six ways big banks screwed Grandma Poorly argued. It’s as if LIBOR could be manipulated without reaction. $$ Jul 28, 2012
  • Fidelity Joins BlackRock in Weighing Libor Action Against Banks This isn’t as easy as it seems; much 2 prove $$ Jul 26, 2012




  • Draghi Said to Hold Talks With Weidmann on Bond Purchases If the Buba plays ball, the sky is the limit. $$ #inflation Jul 28, 2012
  • Draghi Says ECB Will Do What’s Needed to Preserve Euro Uncertain that the ECB will buy lots of Italian & Spanish debt Jul 26, 2012
  • Europe Is Cheap—So Why Can’t I Pull the Trigger? Wait until things stop getting worse $$ Jul 25, 2012
  • Spanish, Italian Notes Rise on Bets for ESM Enhancement “The idea of making the ESM a bank is a game changer,” $$ #no Jul 25, 2012
  • Spain to struggle to fund 2012 debt crunch How long until the next last minute rescue? 10-yr yields over 7.5% $$ Jul 25, 2012
  • Europe Stymies Private Equity as Corporate Buyouts Stall If the banks won’t lend, private equity deals don’t fly $$ Jul 24, 2012
  • Hollande Transaction Tax Drives Investor Quest for Loopholes New trans tax drives investors2use contracts4difference Jul 24, 2012
  • Euro-Zone Government Debts Hit Record Govt debt / GDP 4 whole E-Zone goes from 87.3% @ 12/11 -> 88.2% @ 3/12 $$ Jul 24, 2012
  • Greece Back at Center of Euro Crisis as Spain Yields Soar IMF/Core begins to doubt ability to hold it together $$ Jul 23, 2012
  • YIKES: Spanish Yields Are Surging To Record Highs Time 4 the Germans to buy summer homes in Spain $$ #evercloserunion Jul 23, 2012


US Politics


  • There. MMF reform that works, fit into a single tweet. $$ 🙂 Jul 27, 2012
  • Let MMFs keep a stable NAV, pass through losses thru unit reduction if real NAV<.995, reset real NAV @ 1.0025. Runs would strengthen NAV $$ Jul 27, 2012
  • Why Investors Are Dumping Money Market Funds For Short-Duration ETFs My point: treat MMFs like modified ETFs $$ Jul 27, 2012
  • Maryland Governor Defends ‘Millionaires’ Tax’, Denies Job Losses Can bend rules, since MD is next 2 DC, which slurps $$ Jul 27, 2012
  • Drilling Strains Rural Roads Simple solution: tell energy companies you will not repair roads. They will do it $$ Jul 27, 2012
  • Treasury Eyes Funds Hidden Overseas IRS goes after foreign trusts, seems 2ba piddling amount of money 2 go after $$ Jul 27, 2012
  • Wrong: How2Break NRA’s Grip on Politics: Michael R. Bloomberg The Ethanol lobby is a lot weaker than the gun lobby $$ Jul 27, 2012
  • Estate Tax: Ezra Klein is Wrong! Never trust anyone whose profession starts w/an “A.” 😉 Accts, Attys, Advisors &c $$ Jul 26, 2012
  • Making the Rich Poorer Doesn’t Enrich the Middle Class The govt exists to grow itself until we die. Sad but true $$ Jul 26, 2012
  • The gender wage gap is a myth Diana Furchtgott-Roth makes the same case that many economists have since the 70s $$ Jul 26, 2012
  • New Geithner disclosures further cloud his record Geithner was point man 4the Fed on derivatives. Dropped ball $$ Jul 26, 2012
  • Justice Scalia Disputes Accuracy Of ‘Leak’ Wide-ranging interview of Scalia, whose juridical impact may outlive him $$ Jul 25, 2012
  • Former Citigroup CEO Weill Says Banks Should Be Broken Up Good, he changed his view, my view changed on that also $$ Jul 25, 2012
  • 10 Everyday Items That Cost Way More Because of US Taxes Interesting list, mostly comprised of protectionist taxes $$ Jul 25, 2012
  • The hidden Mitt Romney Romney & Obama have one thing in common: the more you know about them, the less you like them $$ Jul 24, 2012
  • Romney to Attack Obama on Leaks, Defense Cuts “the greatest force for good the world has ever known” US naivete $$ Jul 24, 2012
  • Scalia Offers Up 57 Varieties for Interpreting Legal Texts His manifesto on originalism/textualism $$ Jul 23, 2012




  • Lies, Damned Lies, and China’s Economic Statistics I have some skepticism to US statistics, how much more China? $$ Jul 27, 2012
  • Xi Jinping Millionaire Relations Reveal Fortunes of Elite Communist Party members have access2loans & IPO allocations Jul 27, 2012
  • Capital Outflows Chime With China’s Bears “any currency exchange >$2,000 needs to have a prior reservation made.” $$ Jul 25, 2012




  • Alierta Abandons Dividend Penchant to Save Telefonica Now more interested in $TEF, good cashflow, div shld resume $$ Jul 26, 2012
  • Unilever Warns of Worsening Economy Global economy is weak, even for staple goods. $$ Jul 26, 2012
  • Zynga’s ‘Draw Something’ Isn’t a Pretty Picture Always be wary of fads that have no balance sheet $$ Jul 26, 2012
  • Sanofi Dengue Vaccine Is Promising Good news. Perhaps Dengue Fever may be conquered for the good of mankind $$ Jul 26, 2012
  • Industrias Bachoco Announces Second Quarter 2012 Results Tough read, Q looks good, US acq prob paying off FD:+ $IBA $$ Jul 25, 2012
  • Assurant Reports Second Quarter 2012 Financial Results FIring on all cylinders, & shrinking share count FD: + $AIZ $$ Jul 25, 2012
  • Warren Buffett: Great Investor, Lousy Insurance Salesman? Poor article; Buffett is very intelligent insurance exec $$ Jul 25, 2012
  • link 4 last tweet: You could short the 2.6% bonds and go long default protection for an almost risk-free profit. $$ Jul 25, 2012
  • Someone Is Getting Really Nervous About HP’s Debt If you look at bonds vs CDS, bonds aren’t panicking. FD: + $HPQ $$ Jul 25, 2012
  • Contra: Campbell Chases Millennials With Lentils Madras Curry @ $3/pouch I don’t c a mkt 4 gourmet instant soup $$ Jul 24, 2012
  • Google buys Sparrow for ‘new Gmail project’ Sell your company 2 $GOOG 4 $$ . Get new tasks while old technology dies Jul 24, 2012
  • Iraq blacklists Chevron for Kurdish oil deals Not as big as it seems $CVX has no biz in Arab Iraq $$ FD: +CVX Jul 24, 2012


Rest of the World


  • North Korean Mystery Woman Is Leader Kim Jong Un’s Wife I find it optimistic that he wants to live a normal life $$ Jul 26, 2012
  • Global economy’s cure is worse than the disease Indirectly suggests the best policy would be benign neglect $$ Jul 25, 2012
  • Cyber Attacks on Activists Traced to FinFisher Spyware of Gamma Practice safe computing; scan for rogue processes $$ Jul 25, 2012


Public Radio


  • Public Radio International acquired by Boston public broadcaster WGBH Interesting when a non-profit corp gets bought $$ Jul 26, 2012
  • If it is the same, could NPR or the Corporation 4 Public Broadcasting sell out also? Buffett could give them a good home. Or the Kochs 😉 $$ Jul 26, 2012
  • Grew up in the insurance world, so I’ve seen non-profit (mutuals) buy another mutual or stock company, but is it the same w/WBGH buying PRI? Jul 26, 2012
  • Renaming 2 Private Radio International 😉 RT @timjeby: Big Public Radio News: WGBH in Boston to acquire Public Radio International #pubmedia Jul 26, 2012


Municipal Bonds


  • For further reading consider: Some perspective on the recent California bankruptcies by @munilass aka Bond Girl $$ Jul 26, 2012
  • Muni Blues Worry Investors Municipalities aiming4 strategic default face challenges in courts; favor bondholders $$ Jul 26, 2012
  • Some perspective on the recent California bankruptcies @munilass on how unusual wud b4 muni bonds 2not pay principal $$ Jul 24, 2012


Federal Reserve


  • Bernanke the unready Fed is impotent, but can’t admit it. Bernanke is wrong on monetary policy near 0%. $$ Jul 26, 2012
  • Fed strives to replenish depleted toolkit Doing the same thing, over & over again, but expecting different results $$ Jul 25, 2012
  • Fed Sees Action if Growth Doesn’t Pick Up Soon Doing the same thing over&over again&expecting different results $$ Jul 24, 2012
  • Coming: The End of Fiat Money Nice try. Lot of good stuff 2 read here, but no clincher 4 the return of gold $$ Jul 23, 2012


US Housing


  • By October of 2005 the prices of residential real estate peaked, which led to most of the leverage unwind that was about to happen. $$ Jul 25, 2012
  • Office of Financial Research Annual Report Pp 8-9, first difficulty: by 2005 it was too late to stop the crisis $$ Jul 25, 2012
  • Is This What a Housing Bottom Looks Like? Lazy recovery, as people sell when they can avoid losses $$ Jul 27, 2012
  • Wrong: Reverse mortgages as popular as IRAs in 10 years Must have equity & creditworthy rev mtge lenders. Complex 2 $$ Jul 25, 2012
  • Home Values Post First Year-Over-Year Increase Since 2007 Prices rising on the low end; higher priced problematic $$ Jul 24, 2012
  • Subprime Rally Building as Dealers Sop Up Supply Combination of yield lust & rising housing prices drive up bonds $$ Jul 24, 2012




  • Pig Tissue Seen Fixing Injury That Sidelined Lin New tech uses pig tissue undoes painful damage from torn meniscus $$ Jul 27, 2012
  • Can a Food for Cows Make Healthier Snickerdoodles? Adding some DDG 2baked goods adds protein & fiber, good yes? $$ Jul 26, 2012
  • Closing In on a Cure for Vision Loss Testing “gene therapy, stem-cell therapy & a modified version of vitamin A” $$ Jul 24, 2012
  • Will the world’s greatest startup machine ever stall? Long interview w/President of Stanford re Silicon Valley ties $$ Jul 24, 2012
  • Breadbaskets of Last Resort See Once-in-a-Lifetime Prices Focuses on upper Midwest; great time to have good corn $$ Jul 24, 2012
  • MIT Researchers’ `Cool’ Idea Way cool, allowing 4 cheaper, better milk in rural areas where power is spotty. $$ Jul 24, 2012
  • Contra: The One Capitalism That Dare Not Speak Its Name State Capitalism more prone 2 bubbles than laissez-faire $$ Jul 24, 2012
  • America’s Energy Situation In 15 Maps Refining, production, prices, intl concerns, natgas, crude, coal, solar, wind $$ Jul 23, 2012
  • THE DEFINING DECADE: Why You Can’t Afford To Waste Your Twenties Early success compounds; so does early failure $$ Jul 23, 2012
  • Lobbying Works! Big Spenders Reap Big Stock Gains Says Trennert But what happens if the US Government has to shrink $$ Jul 23, 2012
  • Who Really Invented the Internet? Many did, & they were standing on the shoulders of giants. $$ #ittakesavillage 😉 Jul 23, 2012


Market Dynamics


  • Fidelity Targets Securities Lending The buyside is beginning to fight back against the trust & investment banks $$ Jul 27, 2012
  • Study: High-Speed Trading Hurts Long-term Investors This probably affects those w/higher turnover more $$ Jul 27, 2012
  • Currencies: from Nullifying to Negative What is the game? To make money, or avoid losing a lot? Neg int rates a pain $$ Jul 25, 2012
  • Bond Trading Loses Some Swagger Amid Upheaval Except 4 the most liquid corporates, need broker2find liquidity/bonds $$ Jul 25, 2012




  • Our Olympic Gold in Wit $$ RT @TheLondonWhale: RT take a bow @ReformedBroker: Switzerland tough to beat in gold vaulting Jul 28, 2012
  • “Cultural change cannot be achieved by outsiders, in 1 generation, no matter how much $$ gets spent.” — David_Merkel Jul 27, 2012
  • @brettsimonson Think the direction I would have headed was public policy, which involves a finer view of asset/liab mgmt, run avoidance etc Jul 27, 2012
  • @brettsimonson Hi Brett, no part 2 from what I can see. Very disorganized that week — no power for a week Jul 27, 2012
  • Ditto, well-deserved $$ RT @ReformedBroker: we love you, simone RT @SimoneFoxman: Yay, 5K! Thanks for following, everyone!! Jul 27, 2012
  • @munilass Also, if a kid was disconsolate for a while, before 2AM it was mine. After, it was hers. Jul 27, 2012
  • @munilass When the family was young, my wife & I had a deal. I took midnight feedings, she took the early morning feedings. Jul 27, 2012
  • @munilass My house works like this: I work late b/c it is quiet. My wife who homeschools the kids gets up early b/c it is quiet. Jul 27, 2012
  • @munilass I know many classes of bonds and other fixed income instruments. But I only know enough about munis to be dangerous. Thus I ask. Jul 27, 2012
  • @munilass Decided to review the book “Investing in the High Yield Municipal Market” by Triet Nguyen. If I have Qs, can I ask you? Jul 27, 2012
  • @e_d_sanders Both parties stand for different shades of nothing. They give rhetoric to their bases, do little, and cling to power. $$ Jul 27, 2012
  • RT @Convertbond: Sell the US equity rally hard when Spain’s 2s \ 10s curve starts to re-flatten #Government #Bonds 2 year & 10 year … Jul 26, 2012
  • “”Of course this food is organic. We used Organic Chemistry to create it.”” — David_Merkel $$ $DF Jul 26, 2012
  • Happy 2b your 1st subscriber $$ RT @SNLFinancial: Follow SNL Financial reporters so you’re always in the know: Jul 26, 2012
  • “Why we need to dismantle the Democrat & Republican parties: the national budget slaves for local interests” Merkel $$ Jul 26, 2012
  • A weather forecaster for either WBAL or WTOP said that Maryland gets a derecho once every 5-10 years. Two in one year? Hope not. $$ Jul 26, 2012
  • Just what we need, another derecho $$ RT @BloombergNews: Severe storms, possible derecho forecast for Northeast US Jul 26, 2012
  • RE: @bloombergview Not worthy to be read $$ Jul 26, 2012
  • RE: Loads of 12% coming out mean that only 88% of the money is going to work for the investor.  Doesn’t matter where … Jul 26, 2012
  • Commented on The Economist | Monetary policy: Bernanke the unready Jul 26, 2012
  • “Marriage civilizes, & gives us some hope that he will normalize N. Korea. He lived outside NK 4…” — David_Merkel $$ Jul 26, 2012
  • RT @ReformedBroker: RT @jamielissette: *MOODY’S CHANGES OUTLOOK ON 17 GERMAN BANKING GROUPS TO NEGATIVE Jul 25, 2012
  • “For what it is worth, that’s the way Canada does it. Income taxed @ FMV @ death. No estate tax.” — David_Merkel $$ Jul 25, 2012
  • RE: @CSMonitor The book “Hungry Ghosts” documents The Great Leap Forward very well. Worth a read. $$ Jul 25, 2012
  • “It would be cleaner to tax unrealized capital gains at death, and eliminate the estate tax.” — David_Merkel $$ Jul 25, 2012
  • “Rating agencies are supposed to be behind the curve. They rate over the full credit cycle…” — David_Merkel $$ Jul 25, 2012
  • @e_d_sanders He could have included 1 or 2 more words & it would have been crystal clear. I think the ambiguity was deliberate. I cud bwrong Jul 25, 2012
  • “Don’t open suspicious attachments. Use procexp to review processes. Disable processes you can’t…” — David_Merkel $$ Jul 25, 2012
  • “When computers screen applicants, a skills shortage emerges. Computers seek current perfection, not…” David_Merkel $$ Jul 25, 2012
  • “A case where so many things went wrong, it is amazing that they almost won. Really, they were…” — David_Merkel $$ Jul 25, 2012
  • @e_d_sanders I’m voting third party; I don’t like the GOP either; it’s obvious that no one man builds infrastructure; not a point 2 make Jul 25, 2012
  • @e_d_sanders It’s not a misquote. Read the two paragraphs in context; he is downplaying individual initiative. Jul 25, 2012
  • @havocp I copied the quote from the WH website. Given what O said in the above that, both interpretations are legitimate. Could b clearer. Jul 25, 2012
  • @havocp and I appreciate your comment. I like those that comment, and even those that disagree with me highly. Jul 25, 2012
  • @havocp Doesn’t matter to me. Concentrating effort is significant and deserves a reward, not condescension. $$ Jul 25, 2012
  • RT @pdacosta: Crisis contained, to inhabited areas. RT @SJosephBurns: “The Subprime Crisis will not affect the economy overall.” – Ben B … Jul 25, 2012
  • RT @ritholtz: WSJ reporting “Federal Reserve moving closer to action to spur growth” Bond buying, rate guidance, lower reserve rate amon … Jul 24, 2012
  • RE: @bloombergview You’re still going to need LIBOR, however calculated, for existing contracts. Replacement will be … Jul 24, 2012
  • “Ethics comes before competence. Doesn’t matter how good you are, if you are unethical. The…” — David_Merkel $$ Jul 23, 2012
  • RT @AmityShlaes: “The post office ought to be self supporting. At present business men are deluged with useless mail.” — Calvin Coolidg … Jul 22, 2012
  • @niubi No, b/c many babies do not sleep through the night @ 3 months Jul 21, 2012
  • If I could ship the rain in Maryland 2 the Midwest, I would. But Maryland farmers r having a good year. Corn looks normal & prices r high $$ Jul 21, 2012

I’m on the program committee for the Baltimore CFA Society.  We hold around 10-12 programs per year, meeting for lunch at the Centre Club in Downtown Baltimore.  It’s probably the most visible aspect of the society.  Even when I wasn’t on the program committee, I still brought in some speakers: John Neff, Richard Bernstein, and a few others.

But now the new season approaches, and I have to come up with new names.  People in New York City or DC are easy, because they can just take the Metroliner.  A few other notes: the Baltimore society is equity-oriented.  That means that we can do one or two bond-oriented speakers, but not more.

Instead, we have to focus on:

  • strategists
  • well-known equity investors
  • institutional investors with good track records.
  • Clever niche investors/advisors/economists that are well-known.

Now, the Baltimore Society can pay, but it doesn’t have tons of dough.  We shepherd our resources carefully as the second-largest CFA society run internally. (The largest is Denver.)

So, who should I try to attract to speak to the Baltimore CFA Society?  I have some ideas:

  • Ed Meigs, notable and local high yield manager (The High Yield guy I learned from)
  • Joshua Brown, of The Reformed Broker
  • Eddy Elfinbein, of Crossing Wall Street
  • Barry Ritholtz, of The Big Picture
  • Ronald H. Muhlenkamp of the Muhlenkamp fund.
  • Charles Carlson of the Greenspring Fund
  • Robert J. Stevens, CEO of Lockheed Martin
  • James A.C. Kennedy, CEO of T. Rowe Price
  • David M. Zaslav, CEO of Discovery Communications
  • Arne M. Sorenson, CEO of Marriott International
  • W Edward Walter, CEO of Host Hotels and Resorts Inc.
  • Malon Wilkus, CEO of American Capital
  • Alan Wilson, CEO of McCormick & Co.
  • Don Wood, CEO of Federal Realty Investment Trust
  • Kevin Plank, CEO of Under Armour
  • Tom Giannopoulos, CEO of MICROS Systems

But I am open to other ideas that would prove popular to an equity-oriented audience in Baltimore.  Any ideas for me in the comments? 🙂  Thanks.

When it comes to bonds I have four main ideas.

Those are my strategies and simple enough.  But what do I do when they are disagreeing with each other?  I play for time.  I play my best ideas, and wait for the market to make a big move that I can ride.

I have owned long duration Treasury bonds for the past year, but have not owned them only, but other ideas as well.  Being long credit has worked, whether in:

  • Floating rate loans,
  • Long duration corporates, or
  • Bank preferred stocks

That does not mean I did not have my failures.  I lost a decent amount of money expecting that the Swiss National Bank [SNB] would eventually break its peg versus the euro.  I still have a small bet on that, and still expect that I will make money on the trade, as the position of the SNB is becoming more difficult by the day.

My goal as a fixed income investor is to make money.  Unlike most fixed income investors, my goal is to make a lot of money when it is favorable to do so, and tread water the rest of the time.  I’m treading water now.  Rates are low; yields are low – there aren’t that many distortions to take advantage of.

I await an environment with more opportunities.  I wonder if this is how Seth Klarman feels toward the end of a bull market.  I’m just schnitzeling, and waiting for some real opportunities to show up.

As it is, I use two proxies to guide me: AGG and CSJ.  My performance over the last year was between the two.  In the short run, I look to exceed CSJ.  In the long run, I look to exceed AGG.

Full disclosure: long CSJ

I have often owned companies with little to no sell-side analyst coverage.  Ask yourself this, how many companies trading on US exchanges are there:

  • That have no analyst coverage
  • That are US-based
  • That have a Market Cap over $250 million
  • That aren’t passthrough vehicles
  • And have pitiful liquidity at least

I made the following list by using a Media General database, and cross-checking it with Yahoo Finance.  Yeah, I live on the cheap.  Here we go:

CompanyIndustryTickerMarket Cap $M
Terra Nitrogen Company, L.P.0103 – Chemical ManufacturingTNH            4,235
Icahn Enterprises, L.P.0963 – Retail (Specialty Non-Apparel)IEP            4,065
Valhi, Inc.0103 – Chemical ManufacturingVHI            3,856
Seaboard Corporation0515 – Food ProcessingSEB            2,619
EQT Midstream Partners LP1206 – Natural Gas UtilitiesEQM                908
Contango Oil & Gas Company0609 – Oil & Gas OperationsMCF                901
Nortek Inc0406 – Appliances & ToolsNTK                797
Sabine Royalty Trust0609 – Oil & Gas OperationsSBR                781
Dorchester Minerals LP0609 – Oil & Gas OperationsDMLP                695
Rouse Properties Inc0933 – Real Estate OperationsRSE                681
Star Scientific, Inc.0524 – TobaccoCIGX                590
NL Industries, Inc.0103 – Chemical ManufacturingNL                578
1st Source Corporation0727 – Regional BanksSRCE                547
Apco Oil & Gas International I0609 – Oil & Gas OperationsAPAGF                546
CorVel Corporation0806 – Healthcare FacilitiesCRVL                518
National Western Life Insuranc0709 – Insurance (Life)NWLI                513
Village Super Market, Inc.0957 – Retail (Grocery)VLGEA                468
Atrion Corporation0812 – Medical Equipment & SuppliesATRI                416
Presidential Life Corp0709 – Insurance (Life)PLFE                411
PHI Inc.0612 – Oil Well Services & EquipmentPHII                409
Seneca Foods Corp0515 – Food ProcessingSENEA                324
Lifevantage Corporation0809 – Major DrugsLFVN                306
Preformed Line Products Compan0127 – Misc. Fabricated ProductsPLPC                300
Westwood Holdings Group, Inc.0718 – Investment ServicesWHG                294
Ladenburg Thalmann Financial S0718 – Investment ServicesLTS                287
Camden National Corporation0727 – Regional BanksCAC                281
Federal National Mortgage Asso0703 – Consumer Financial ServicesFNMA                278
Fisher Communications, Inc.0906 – Broadcasting & Cable TVFSCI                278
Pendrell Corp0718 – Investment ServicesPCO                277
U.S. Lime & Minerals Inc.0212 – Construction – Raw MaterialsUSLM                271
Winmark Corporation0963 – Retail (Specialty Non-Apparel)WINA                264
Arden Group, Inc.0957 – Retail (Grocery)ARDNA                263
Clifton Savings Bancorp, Inc.0727 – Regional BanksCSBK                262

Not so surprising, there are:

  • A lot of limited partnerships and royalty trusts.
  • Many financial firms.
  • Many companies where there is a controlling shareholder, and liquidity is scarce relative to size.

All that said, this is an area of the market where few tread, and there may be some values to be had.

Now, there were some companies that were far less liquid, and with less disclosure,  that fit the above criteria, and I list them here.

Extremely Limited Liquidity

CompanyIndustryTickerMarket Cap $M
Belk Inc0951 – Retail (Department & Discount)BLKIA            1,839
SunGame Corporation1036 – Software & ProgrammingSGMZ                746
First National Bank Alaska0727 – Regional BanksFBAK                555
Computer Services, Inc.1036 – Software & ProgrammingCSVI                463
First Citizens Bancorporation,0727 – Regional BanksFCBN                410
TherapeuticsMD Inc0921 – Motion PicturesTXMD                311
Hills Bancorporation0727 – Regional BanksHBIA                304
Farmers & Merchants Bancorp0727 – Regional BanksFMCB                284

Some of these look promising as longs, if you can get shares. Others look promising as shorts, if you can get a borrow.  Remember that the illiquid end of the market is the place where promoters play, creating their own internal version of the “bucket shop,” getting people to buy in at higher valuations, while they sell out for a profit.

These are companies where personal research can pay off, because few others are analyzing them.  I own one of them, and it is:

Full Disclosure: long NWLI

I used to think that Barack Obama was one of the more intelligent Presidents of the United States, but I no longer do.  Consider his recent statements, which show his socialistic attitude:

     There are a lot of wealthy, successful Americans who agree with me — because they want to give something back.  They know they didn’t — look, if you’ve been successful, you didn’t get there on your own.  You didn’t get there on your own.  I’m always struck by people who think, well, it must be because I was just so smart.  There are a lot of smart people out there.  It must be because I worked harder than everybody else.  Let me tell you something — there are a whole bunch of hardworking people out there.  (Applause.)

     If you were successful, somebody along the line gave you some help.  There was a great teacher somewhere in your life.  Somebody helped to create this unbelievable American system that we have that allowed you to thrive.  Somebody invested in roads and bridges.  If you’ve got a business — you didn’t build that.  Somebody else made that happen.  The Internet didn’t get invented on its own.  Government research created the Internet so that all the companies could make money off the Internet.

No man is an island.  We know that.  But in any big enterprise, there is the difficulty of organizing the efforts of all to create something that will satisfy the needs/desires of many.  It is true in business; it is true in war; it is even true in politics, more’s the pity.

Those that structure and plan, who create work so that others can do relatively simple tasks and be paid are valuable people; they have unique skills, and deserve to earn a lot if their efforts result in a lot of satisfied customers.

Our public schools do not train people to be entrepreneurs; they train people to be clerks and technicians.  That said, one advantage the US has over other nations is that we are willing to be flexible, and let failures figure out how they will survive.  Not knowing how you will pay the bills is a great incentive toward initiative.

Back to the main topic.  If you have built a successful business, you have done an amazing thing that most people could not do.  You took the efforts of many men and concentrated them toward a specific task of satisfying the needs of customers.  That is tough stuff, and few can do that well.

Bureaucrats can’t create a business.  Okay, maybe they can create failures like Fannie and Freddie.  They might be able to create a technology by accident, but not know what it could be used for.  Though Arpanet was the precursor to the Internet, it could not create the wide diversity of services created in the private sphere.  It’s like talking about the things the Chinese invented ahead of the West, but they never exploited those inventions.  The private sector did far more to make the Internet useful than the US Government did.

Having a concentrated interest for profit is what sharpens businesses, and makes them more responsive to the needs of people.  This is preferable to having a big government dictate what businesses and individuals ought to do, because the government by its nature is either “one size fits all” (good, sort of) or cronyist, playing favorites (bad).

Everyone has people who helped them and trained them in this life.  That doesn’t mean the government can take credit and demand full allegiance and high taxes.  Most of the time, productive people had good parents, and as one of my mentors said to me, “Children who are not taught by their parents do not get taught.”  He put five children through the public schools, all of them bright.

It takes thought and effort to create a big organization and prosper.  Don’t let naysayers deceive you.  If you built a successful business, you did something significant.  You built it.  Yes, the common resources of society support many of us, but using the common resources and the efforts of those who are only capable of doing a job is significant, and worthy of praise, not condescension from a man who has never built anything significant in his life, and presently destroys opportunities through bad policy.

Before I start this evening, a note to readers: if you like my reviews, vote them up at

This book is very different than most I review.  First, it should not have existed.  While the author was under house arrest, he found time to dictate the book, recording over music tapes of his children & grandchildren.  He then  handed out the tapes few-by-few to friends who then somehow gathered them together into one place to create this book which is available in English and Chinese.  (Again, to those reading this at Amazon, there are links at my blog.)

Zhao Ziyang was a member of the Chinese Communist Party from his youth, joining the party at age 19.  He proved to be an able administrator, and the provinces that he served/led tended to prosper.

Why did they prosper?  He gave them more freedom economically.  Control was only at the highest levels, whereas low level control in other provinces of China tended to produce bad results.  Freeing up agriculture aided the Chinese economy in a large way: the people no longer starved.

Zhao kept his head low during “The Great Leap Forward,” and also during “The Cultural Revolution.”  Until he became Premier in 1980, he kept his head low.  He was the sort of guy who got things done quietly, and did not trumpet his achievements.

As Premier, he was entrusted with oversight over the Chinese economy.  Because of his prior successes he was inclined to offer more an more freedom to the economy, and did so until his ouster in 1989.  This resulted in considerable economic growth, but also resentment from hardliners, who felt that they were losing control of China.

In 1985, the hardliners started to go after Hu Yaobang, General Secretary of the Party, who was relatively liberal on freeing up the economy.  By 1987, they oust him, and against his wishes, Zhao Ziyang becomes the General Secretary of the Party.

In April of 1989, Hu Yaobang dies.  Students protest in the streets because he had offered some hope of political reform.  Zhao urges lenience to the protestors, and urges them to go back to their studies.  They continue the protest.  The hardliners prevail upon Deng Xiaoping to use the military against the students, who may have wanted to preserve Zhao’s decision, but not against unified opposition from hardliners in the Party.

Zhao chose to step down, rather than enforce Deng’s decision, which came with no vote in favor on the Standing Committee.  The Tienanmen massacre occurred, and Zhao Ziyang was confined to his home for the next 15+ years.

That’s the history, and very brief.  Here are a few things to make the matters more clear:

To those in the upper levels of the Party, the Cultural Revolution was a horror.  The ideological rigidity of the far left of the Party was stifling, and being killed or re-educated for slight variations from the party line was not something that most wanted to repeat after the death of Mao.  We can all be grateful that Mao recalled Deng from re-education shortly before his death.

Zhao Ziyang worked as a “fitter” at the Xiangzhong mechanics factory in Lianyuan County, in the Province of Hunan during part of the Cultural Revolution.  He was purged in 1967, and restored relatively quickly in 1971.

But there were some in the Party who did not like any type of reform.  They liked the control from the Marxist/Leninist policies, whether they grew the economy or not.  Even if rejecting the excesses of the Cultural Revolution, they still wanted as much control as possible.  Those “Party Elders” made life tough for Hu and Zhao.

Deng Xiaoping was a man who wanted the benefits of free markets, but would not free politics.  He saw how the experiments of Hu and Zhao were leading to a stronger economy, but did not want to countenance the idea of Democracy.  He wanted the Communist Party to have singular control over the economy, because it enabled the government to act quickly as it needed, with all the resources of China at its disposal.  Deng wanted economic reform, but when it was convenient for him to placate hardliners, he threw Hu, then Zhao, under the bus.  He eventually in 1992 took a tour through the special economic zones of Southern China, showing his alliance with economic reform.

Deng wanted political reform, but that has various meanings.  To Hu and Zhao, it meant more democracy and economic freedom.  To Deng, it meant cleaning up the corruption that inevitably occurs in a mixed system — socialism typically has a lot of corruption.  Deng was not realistic; you can’t change the nature of man.  Hu and Zhao knew that freeing things up would eliminate incentives to cheat.

At the end of the book, Zhao talks about the need to move China, or at least the Party, to some form of Democracy, with checks and balances, which is something that Deng does not want, because it slows the government’s power to act.

Zhao and Hu were two men born ahead of their time.  Every citizen of China should be grateful for all they did and suffered, because they tried to promote your liberty.


In general, I think Zhao was naive, and Hu was tone-deaf.  Hu did not respond to the requests of Deng to act on bourgeois liberalism.  Zhao let the student demonstrations after Hu’s death  frame him.

After he was confined to his house, he appealed to many senior party members as to what the Chinese Constitution said was illegal about his imprisonment.  He was naive.  After going through the Great Leap Forward and the Cultural Revolution, why should anyone believe that the Chinese Government would honor its own constitution?  After all, there is no division of powers, as Zhao sought, and Deng did not.

Who would benefit from this book:   Anyone who wants to understand the politics and economics of China better would benefit from this book.  If you want to, you can buy it here: Prisoner of the State: The Secret Journal of Premier Zhao Ziyang.

Full disclosure: I bought this book with my own money.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.