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Book Review: The Snowball, Part Four

Saturday, December 22nd, 2012

One thing I did not leave clear from my prior writing: Buffett does not think in terms of market value. He thinks in terms of book value, and how to compound it. That is how I think the markets as well. I think of the markets like a businessman does, and so does Buffett.

Why should being a businessman, and being an investor be so different? Answer: they should not be thought of differently. This is why value investors look at the returns relative to the price they paid.

Buffett as an Investor

Buffett had a strong grounding in probability. Whether it was with stocks, or at the racetrack, he was smart enough to find an edge.

He was also wise enough to understand the concept of discounting. Discounting is the cousin of accumulation. One looks forward, the other looks backward.  Buffett understood when it was smart to receive cash and distribute cash. He knew what a dollar was worth. He knew when the dollar was worth in the future. This grounded his sense of investing.

He invested in many industries: Newspapers, Utilities, Insurance, Furniture, Jewelry, Pipelines, Railroads, Manufactured Housing, Coke, Shoes, Textiles, and Airlines.

He also sought a margin of safety. What would be the maximum bad outcome if he invested in a company? If you can limit the downside, you have the capability of making money on the upside.

Buffett also like to play Bridge. Bridge is a complex game; you do the best if you bid to take the amount of tricks that you will actually take. Bridge favors people who can estimate well, and Buffett is one of those people.

Buffett is a very bright guy. Very, very bright.

Buffett and Business Ethics

Buffett is an ethical businessman. Probably one the most difficult parts of his life was when he was chairman of Salomon Brothers. In that situation, he had to play a delicate game trying to satisfy the regulators in Washington, DC, and satisfy investors who held the stocks and bonds of Salomon Brothers. This was a very difficult task, but Buffett performed extremely well. In some ways, I think this is the highlight of his career. I think this, because the regulators were stacked against him, and he succeeded in a large measure. Without Buffett, Salomon Brothers would have been bankrupt. Buffett triumphed against both economic and political forces.

And at the time he did that, he made Salomon Brothers a far better place. He stressed ethics above economics. Bravo! That is what needs to happen in almost all corporations United States now.

Now, when his son Howie had troubles ADM, Buffett had considerable advice for his son but he did not demand that Howie do it he said. But Howie listened to his dad and left ADM before the crisis erupted. As a result, Howie’s reputation stayed clean.

In general, Buffett was a Boy Scout when you consider business ethics. But when you consider other aspects of ethics, he was not so.

Politics

Buffett’s father was one of the most conservative Republicans in the House of Representatives. As a boy, he campaigned for his father. He switched his political views after he married Susie. After he married Susie, the first thing was opposing racism. That was a really good thing, and both he and Susie did many good things in integrating our society.

This is hard to impress on the black children that I have adopted. With no large amount of racism, it is hard to explain to them what others went through 50-150 years ago.

But I disagree with Buffett who bought the concept of the population bomb from Paul Ehrlich. People are born with a mouth and brain. The brain is far more important than the mouth. No matter how much the population grows, we will find ways to make our resources stretch further. The largest scarcity on earth is good ideas.

Munger and Buffett led the way in California on the issue of abortion. To me, this is the worst thing about them. Life begins at conception. Every embryo has unique DNA. Embryos begin most of their adult human actions between two and three months after conception. It is cruel to abort them. Much as people mourn the deaths of six and seven-year-olds in Connecticut, we kill far more children when prior to birth, by a factor of 10,000.

Buffett also favored taxing the wealthy. But most of his tax proposals would not tax him. This is the most hypocritical part of Buffett. He could pay extra tax to the government off of his embedded gains in the stock that he holds of Berkshire Hathaway. Berkshire Hathaway itself could just pay off their deferred tax liabilities. But he doesn’t do that. Instead, he asks others to pay what he will not.

Food

Though I like all kinds of food, I find it amusing that Buffett does not want to eat anything that a three-year-old does not eat. I also find it amazing that he is still alive following such a diet.

That’s one of the cute parts of the book – watching when Buffett turns away food, and the efforts that they make to provide hamburgers and steaks to him in areas where that is harder to achieve.

Summary

I’ve tried to give you all the main themes of the book The Snowball. The biggest theme of the book revolves around Buffett’s first wife Susie. For more than 20 years, Susie was the core of Buffett’s life. She gave him a life after the harsh treatment his mother gave. But after many years of marital neglect, she left him, and that is to her discredit. (Of course, Buffett could have solved this by spending less time on business and more time on his marriage.)

Then when Susie died, that was the next largest theme of the book. She did not care for herself well, but Susie was beloved by almost everyone mentioned in the book.  I wonder at an alternative history where Susie stayed at Warren’s side, and sang without leaving him.  Warren might have done better, far better.

Warren Buffett is an amazing man, and I look up to him, leaving aside his ethical lapses.  This book is the best book that describes him of all the books that have been written about him.  Alice Schroeder did an excellent job on this book.  Warren Buffett should be grateful to Alice Schroeder for this book.  It gives a fair but believable representation of his life.

On Game Theory and Politics

Saturday, December 22nd, 2012

Game theory has always been relevant to American politics, and politics generally.  The basic rule in a multiple player game is “create a coalition that has a majority of the voting interest,” and you win.  Because of division of powers, in the US, this is more complex than in a parliamentary setting.  But let’s take as an example the US House of Representatives.

Imagine for a moment that the House has the following breakdown:

  • 45% Democrats
  • 45% Republicans
  • 10% t-party Republicans

I don’t think that set-up is far from the truth, but how would anyone get a majority there?  In this stylized example, there are only three ways to do it:

  • Democrats ally with Republicans, and the center rules. “La grande coalition”
  • Democrats ally with the t-party — good luck with that.
  • Republicans ally with the t-party. (And any proposal gets shot down by Obama, if not the Senate.)

The fourth possibility is that nothing happens, which has been my default view for some time, and we go over the cliff and hit the debt ceiling.

This is why a small part of our legislators can play such a big role.  One can argue that it is unfair, but they are playing by the rules, and the results are not all that different from what European countries with multiple parties experience.  You have to assemble a coalition in order to govern.  Often it is one small party near the center or the edges that holds the balance of power.

Thus, in  situation like this, how could it get resolved? Obama needs to talk to the Tea Party and agree to something mutually acceptable.  Ronald Reagan reached across the aisle to Democrats.  Bill Clinton did deals with Republicans.  Obama needs to do a deal with the t-party, or strike a deal that non t-party Republicans and Democrats could accept.

My view here is different than most, but in my view there are two more intransigent parties here: Obama and the t-party.  If the the non-t-party Republicans and Democrats in the House could agree, that proposal could go through the Senate, and be signed by the President.  Boehner should not negotiate with Obama, but Pelosi.

The alternative is going over the fiscal cliff, which I have argued for a longish amount of time might not be so bad, though Congress will regret ceding control of spending to he Executive Branch.  At least the budget will be balanced, and we will have more certainty on economic policy.  Also, it will force a better negotiation, and sharpen the concerns of voters.

=–=-=-=-==–==-=-=-=-=-=-=–=-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-

If we really want to improve our nation, we need to take action to remove the entrenched powers of the Republicans and Democrats, so that other parties can get some representation.  We need to have laws such that anyone can submit a redistricting map, and so long as the map meets the test of other laws, the map with the shortest amount of internal boundaries wins.  Maryland, which is a poster child for corruption, would be far better governed if the power was taken out of the hands of entrenched political interests, and given back to the people.  Or at least a computer, which can be neutral.

Governments mostly reflect cultures, leaving aside gerrymanders and such. If we want to improve the US, we need to improve our own moral nature individually.  If we are weak and lazy as individuals, so will our government be, and it will be our fault collectively that we let a great nation fail.  If a culture fails, the nation will not be far behind.

 

Sorted Weekly Tweets

Saturday, December 22nd, 2012

Macroeconomics

 

  • Here’s my plan for reducing the deficit: http://t.co/XJPjf8A5 #mydeficitplan via @wsj Draconian, I know, but the budget shoould b balanced Dec 21, 2012
  • Canada’s exports crucial as sluggish growth continues: IMF http://t.co/iIOJ6PoF Bank of Canada should raise rates 2 reduce excessive debt $$ Dec 21, 2012
  • Everything You Need To Know About the Economy in 2012, in 34 Charts http://t.co/aXnjSkR0 Good stuff; could have been formatted better $$ Dec 21, 2012
  • Fiscal Cliff’s Dirty Secret: It’s Not About Taxes At All, But Too Much Spending http://t.co/UY8rKW9h We need 2 deal w/SS, Medicare & Defense Dec 20, 2012
  • We’ve Nationalized the Home Mortgage Market. Now What? http://t.co/YSCrvVmK Congress loves 2 have cows around that they can milk for $$ Dec 20, 2012
  • EU Banking Re-Unions http://t.co/khSA0co0 The lack of a timetable indicates that things aren’t really finalized; not sure this will fly $$ Dec 20, 2012
  • ‘Spending Cuts’ Lose Something in Translation http://t.co/DYFxVMno Only in DC is reducing planned growth in spending called a cut $$ Dec 20, 2012
  • Money Funds Brace for Flood http://t.co/4J7VWuxx MMFs r between a rock & a hard place: loose Fed policy & regulatory over-reach $$ Dec 20, 2012
  • Wall Street’s Biggest Geniuses Reveal Their Favorite Charts Of 2012 http://t.co/at12mMsV Very long, but lots of good stuff $$ Dec 20, 2012
  • My forward estimates, derived from TIPS are rising, 2014 inflation, and 2018-2022 inflation. The latter has… http://t.co/tgrGfiDG Dec 19, 2012
  • Estimated 2018-2022 inflation rate continues to rise: http://t.co/ebqeM5KJ Stagflation may be coming. cc: @federalreserve #stagflation $$ Dec 19, 2012
  • Estimated 2014 inflation rate continues to rise: http://t.co/ZrvIc5Nk Stagflation may be coming. cc: @federalreserve #stagflation Dec 19, 2012
  • Economics may be dismal, but it is not a science http://t.co/I6B9LbSw No universal economic theory, & new economic thinking must be eclectic Dec 18, 2012
  • Fisher: Fed Risks ‘Hotel California’ Monetary Policy http://t.co/fRKOYl9d When the Fed starts 2 tighten, it will b hard 2 do $$ Dec 17, 2012
  • FDIC Guarantee Program Set to Expire After Senate Block http://t.co/qPdQNWQF Will squeeze the short end of the yield curve further $$ Dec 17, 2012
  • US Banks Lack Liquidity to Withstand Crisis, Study Says http://t.co/psmQEP1z Liquidity mismatches r pernicious; key risk gets ignored $$ Dec 17, 2012
  • Mkts r discounting mechanisms. Temporary events like bond ratings, debt ceiling & fiscal cliff should not affect market much $$ Dec 17, 2012
  • So, as an example, if the govt runs a deficit, it should not stimulate much b/c people discount future econ adjustment b/c of more debt $$ Dec 17, 2012
  • Same 4 monetary policy; the Fed can “stimulate” as much as it likes; mkt players discount the future removal of policy, inflation, etc. $$ Dec 17, 2012
  • Cliff? What Cliff? http://t.co/QEvklDQU Or maybe, just maybe investors don’t care whether we go over the “fiscal cliff” or not. $$ Dec 17, 2012

 

Stocks & Sectors

 

  • There are 272 gold & silver companies trading on US exchanges or OTC. 59 of them have mkt caps > $100M. 22 of them have mkt caps > $1B $$ Dec 21, 2012
  • Aviva Sells US Life Business to Apollo for $1.8B http://t.co/UqM2kqyr When Aviva bot Amerus, I said that they overpaid massively. Proof $$ Dec 21, 2012
  • Value Investing In Practice: A Conversation About Oaktree Capital http://t.co/4FVok5wz Good value investing does not hyper-diversify $$ Dec 20, 2012
  • ICE in Deal to Buy NYSE http://t.co/ik348vsZ New era; expect 2c more deals like this. As an aside average holders of $NYX stock lost $$ Dec 20, 2012
  • Buffett’s Leading The Corporate Buyback Surge http://t.co/U3piJgDv He has the $$, & 1.2x BV is a defensible floor ||| FD: + $BRK.B Dec 19, 2012
  • Investment Fads and Themes by Year, 1996-2012 http://t.co/cvLFKyRE @reformedbroker on what the broad themes this year & back to 1996 $$ Dec 19, 2012
  • Alterra up after deal, analyst positive on Bermuda peers http://t.co/Y5jTB40c Room 4 a new round of consolidation. $MKL buys $ALTE $$ Dec 19, 2012
  • $ALL Bets on Home Insurance as Stock Rally Withstands Sandy http://t.co/XBQOOSB5 Insured damages (excl flood) low4 Sandy; premratesflat $$ Dec 19, 2012
  • Stocks Held Hostage as CEOs Plan Spending Cuts http://t.co/5c7nBKAS It is difficult to avoid deflation; so much uncertainty presently $$ Dec 18, 2012

 

Credit & Fixed Income

 

  • Swaps ‘Armageddon’ Lingers as New Rules Concentrate Risk http://t.co/QK3s19Hz Clearinghouses r not a panacea; it is possible 4 them 2 fail Dec 21, 2012
  • Americans Hacked Don’t Know Chamber Left Them Alone http://t.co/DSBDUijq Common programs place yr computr @ risk; CoC defends SW makers $$ Dec 21, 2012
  • The Indianapolis 500 of Corporate Bonds Yields http://t.co/dCamXED3 Too much $$ flowing into corporate credit; feels like 2006 Dec 20, 2012
  • India Cash-for-Gold Loans Hide Shadow-Banking Risks http://t.co/BGnO4YWI 2much lending creates a mess; 2much secured lending creates a panic Dec 20, 2012
  • Pimco Sees Spreading Slowdown Boosting [Australian] Bonds http://t.co/oDFSkGoF Pimco buying the debt of fringe developed nations $$ Dec 19, 2012
  • CAB Legislation Expected in January http://t.co/TSuxBmM4 California legislation proposed 2 limit issuance of Capital Appreciation Bonds $$ Dec 19, 2012
  • Why China May Be Facing US-Style Credit Crunch http://t.co/99xMzC3M “To some extent, this is fundamentally a Ponzi scheme,” [Xiao] said. $$ Dec 19, 2012
  • Pimco’s Gross Cuts Back on MBS http://t.co/4FaxLTKq Lightening up on MBS & Corporates, buying developed fringe, sticking w/TIPS $$ Dec 19, 2012
  • Mind the rate risk http://t.co/nVqjlWW9 Rates may stay low 4 a while, but when they run up, total returns could b worse than 1994 $$ Dec 19, 2012
  • Spain House Prices – Deconstructing Spain http://t.co/7ARRPZqS Housing prices continue 2fall, more foreclosures, setting up bad bank fund $$ Dec 17, 2012

 

Energy

 

  • Valero Received Approval 2 Ship US Crude 2 Quebec Refinery http://t.co/ojABCqu1 Could b start of something big: US exports oil FD:+ $VLO Dec 20, 2012
  • Extracting shale oil from a Dead Cow http://t.co/bok4bNE7 Interesting: after the expropriation of Repsol that oil majors line up4more $$ Dec 20, 2012
  • Gasoline at US Pumps Drops to Lowest in a Year on Supply Gain http://t.co/4pI5SXiV Good news coming to users of refined fuel products $$ Dec 19, 2012
  • California refiners dreamin’ of shale oil face hurdles http://t.co/vJgiW4rm Many efforts t get cheap oil 2 CA; $24/bbl price difference $$ Dec 17, 2012

 

Other

 

  • CEOs Concerned about the Time and Cost of Implementing Predictive Analytics http://t.co/QcABrcFH Big data facilitates cluster pricing $$ Dec 20, 2012
  • In the Flesh: The Embedded Dangers of Untested Stem Cell Cosmetics http://t.co/de2aio1V Adult stem cells can do as much harm as good $$ Dec 19, 2012
  • The First Time Tech Ruined the Music Business http://t.co/d0RE4002 As technologies improve all manner of “rights” issues crop up $$ Dec 18, 2012
  • Advisers Question Modern Portfolio Theory http://t.co/lLbCVvgL Look through the security 2 the underlying economics of the investment $$ Dec 17, 2012
  • Twitter has started rolling out the option to download all your tweets http://t.co/IIOVO6mJ Not common yet, but may b coming soon $$ Dec 17, 2012
  • Schools Safer Than 1990s as Educators Anticipate Killers http://t.co/aQaB6G6Q Students r far less likely2b killed in school than elsewhere Dec 17, 2012
  • Highest-Paid California Trooper Is Chief Banking $484,000 http://t.co/JwgYWfg2 Giving officers comp time rather than $$ 4 unused vacation Dec 17, 2012
  • ‘Followers for sale’: Twitter’s very own black market http://t.co/HKCqo074 Fake Follower Check will estimate how many followers r real $$ Dec 17, 2012
  • SEC Says Asset Firm Manipulated Trades to Enrich Some Clients http://t.co/L8IJQ77k I remember their ads, proclaiming their track record $$ Dec 17, 2012

 

Wrong

  • Bad idea: Africa Dreams of Building Telescopes to Study Space http://t.co/gSwkKIBs Would make more sense 4 Africa to fix agriculture $$ Dec 20, 2012
  • Wrong: US should intervene in Nagorno-Karabakh process at the highest level http://t.co/2tJTKtht We should stick 2r own business $$ Dec 18, 2012
  • Wrong: This is why I generally don’t like Quartz; pretending to be smart $$ RT Our favorite charts of 2012 http://t.co/w2bvLDvX Dec 18, 2012

 

Replies & Comments

  • “This would have been a better article if you had put separators between each graph/explanation.” — David_Merkel http://t.co/uoMy61H1 $$ Dec 21, 2012
  • @EddyElfenbein Thanks, Eddy. Dec 19, 2012
  • @geekpryde Hey, thanks for the kind words, I appreciate that you follow me. Dec 19, 2012
  • @VIXandMore Ludwig is letting us down, and 3 days after his birthday. Call Schroeder ;) Dec 19, 2012
  • @Alea_ Cool new avatar, I like it Dec 19, 2012
  • @Money_in_Stereo Well said, though I am not an expert there. Thanks for sharing that. Dec 18, 2012
  • @BarbarianCap Hint: if company is offering u a nice buyout, they r offering less than its worth, unless u no more about when u will die $$ Dec 18, 2012
  • @volatilitysmile @carney I knew a close adviser of Mozillo; he told me stories of how disconnected Angelo was w/reality in 2009 $$ Dec 17, 2012
  • @nicster There have been many changes, but they are all local, and don’t make the news. US Govt was stupid on the shoe bomb. Local better $$ Dec 15, 2012

Retweets

  • Amazing RT @moorehn: “the average lifespan of American musical superstars in the pop, rock and rap genre is only 45.” http://t.co/uXVNuStF Dec 20, 2012
  • Practically. Old bond mgr rule: underweight the most rapidly growing debt class $$ RT @ToddSullivan: didn’t they already do student loan? Dec 20, 2012
  • Remember deriving formula when younger $$ RT @munilass: Twelve Days of Christmas and tetrahedral numbers http://t.co/VVNnyU2V (via @ptak) Dec 20, 2012
  • You can say that again $$ RT @japhychron: @AlephBlog Always funny the way they call economics a science. Studying people is anything but. Dec 18, 2012
  • Banks are insolvent & w/large & rapidly growing budget deficit $$ RT @FGoria: DJ: Cyprus May Be Days Away From Default — Fin Min Official Dec 17, 2012
  • Sad & dumb $$ RT @carney: You’d never guess who has a completely self-serving & bonkers theory of the financial crisis. http://t.co/LIAd8WqB Dec 17, 2012

 

Twitter Summary

  • My week on twitter: 72 retweets received, 1 new listings, 85 new followers, 132 mentions. Via: http://t.co/SPrAWil0 Dec 20, 2012

 

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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