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Best of the Aleph Blog, Part 24

Friday, April 4th, 2014

These articles appeared between November 2012 and January 2013:

On Time Horizons

Investment advice without a time horizon is not investment advice.

This Election Will Solve Nothing

So far that is true of the 2012 elections.


We need to add “None of the Above” as an electoral choice in all elections.

Eliminating the Rating Agencies, Part 2

Eliminating the Rating Agencies, Part 3

Where I propose a great idea, and then realize that I am wrong.

The Rules, Part XXXV

Stability only comes to markets in a self-reinforcing mode, from buy and hold (and sell and sit on cash) investors who act at the turning points.

The Rules, Part XXXVI

It almost never makes sense to play for the last 5% of something; it costs too much. Getting 90-95% is relatively easy; grasping for the last 5-10% usually results in losing some of the 90-95%.

Charlie Brown the Retail Investor

Where Lucy represents Wall Street, the football is returns, and Charlie Brown is the Retail Investor. Aaauuuggh!

On Hucksters

Why to be careful when promised results seem too good, and they get delayed, or worse.

Bombing Baby BDC Bonds

Avoid bonds with few protective covenants, unless the borrower is very strong.

On Math Education

Why current efforts to change Math Education will fail.  Pedagogy peaked in the ’50s, and has been declining since then.

On Human Fertility, Part 2

On the continuing decline in human fertility across the globe.

If you Want to be Well-off in Life

Simple advice on how to be better off.  Warning: it requires discipline.

Young People Should Favor Low Discount Rates

If we had assumed lower discount rates in the past, we wouldn’t have the problems we do now.  (And maybe DB pensions would have died sooner.)

Problems in Life Insurance

On why we should be concerned about life insurance accounting.

Investing In P&C Insurers

On why analyzing P&C insurers boils down to analyzing management teams.

Selling Options Cheaply (Did You Know?)

Naive bond investors often take on risks that they did not anticipate.

Book Review: The Snowball, Part One

Book Review: The Snowball, Part Two

Book Review: The Snowball, Part Three

Book Review: The Snowball, Part Four

Book Review: The Snowball, Epilogue

My review of the most comprehensive book on the life of Warren Buffett.

On Watchlists

How I met one of the Superinvestors of Graham-and -Doddsville, and how I generate investment ideas.

Why do Value Investors Like to Index?

How I admitted to not having  a correct perspective on value indexing.

Evaluating Regulated Financials

Why regulated financials are different from other stocks, and how to analyze them.

Locking in a Smaller Loss

Why people are willing to lock in a loss against inflation, because of bad monetary policy.

Why I Sold the Long End

Great timing.

The Evaluation of Common Stocks

Value investing is still powerful, but the competition is a lot tougher.

The Order of Battle in Financial Planning for Ordinary Folks

The basics of personal finance

Sorting Through the News

How to use my free news screener to cut through the news flow, and eliminate noise.

On Financial Blogging

So why do we spend the time at this?

Matching Assets and Liabilities Personally

How to manage investments to fit your own need for cash in the future.

Penny Wise, Pound Foolish

How short-sighted, incompetent managers destroy value.

Expensive High Yield – II

No such thing as a bad trade , only an early trade… high yield prices moved higher from here.

2012 Financial Report of the US Government

Chronicling the financial promises made by the Federal Government

On Insurance Investing, Part 1

On Insurance Investing, Part 2

On Insurance Investing, Part 3

The first three parts of my 7-part series on how to understand this complex group of sub-industries.

How to Become Super-Rich?

Even Buffett didn’t get super-rich by only investing his own money.  He had to invest the money of others as well.  The super-rich form corporations and grow them; they build institutions bigger than themselves.

The Product that Never saw the Light of Day

On the Variable Annuity product that would simply be a tax scam.  Later I would learn that product exists now, just not in the form I proposed 8 years earlier when it didn’t exist.

Best of the Aleph Blog, Part 23

Thursday, April 3rd, 2014

Before I start this evening, I would like to explain some of the reasons for these “Best of the Aleph Blog” articles.  I write these no closer than one year after an article was written, so that I can have a more dispassionate assessment of how good they were.  I write these for the following reasons:

  • Some people want a quick introduction to the way I think.
  • Some publishers on the web want additional copy, and I let them republish some of my best pieces.
  • One day I may bundle a bunch of them together, rewrite them to improve clarity, and integrate them to create a set of books on different topics.
  • One of my editors at RealMoney once shared with me that I was one of the few authors there whose articles got re-read, or read after a significant time had passed.  This is meant to be mostly “timeless” stuff.
  • New readers might be interested in older stuff.
  • I enjoy re-reading my older pieces, and sometimes it stimulates updates, and new ideas.

Anyway, onto this issue of the “Best of the Aleph Blog.”  These articles appeared between August 2012 and October 2012:

On Credit Scores

Why credit scores are important; make sure you guard yours.

Retail Investors and the Stock Market

On the pathologies of being an amateur investor when there are those who will take advantage of you, and you might sabotage yourself as well.

On the Poway School District

Goes through the details of how a school district outside San Diego mortgaged the future of the next generation who will live there, if any will live there.

Using Investment Advice, Part I

Using Investment Advice, Part II

Using Investment Advice, Part III

Using Investment Advice, Part IV

A series of articles inspired by what I wrote at RealMoney, encouraging people to be careful about listening to advice in the media on stocks, including those recommended by Cramer.

The Future Belongs to Those with Patience

On why patience and discipline are required for good investing.

What Caused the Crisis?

A retrospective, if somewhat controversial.

On the International Business Machines Industrial Average

Replace the DJIA with a new cap-weighted index of the 30 largest capitalization stocks.

How Warren Buffett is Different from Most Investors, Part 1

How Warren Buffett is Different from Most Investors, Part 2

You have to understand Buffett the businessman to understand Buffett the investor.

Volatility Analogy

How an interview I messed up led to an interesting way to explain volatility.

Spot the Gerrymander

Eventually we need to eliminate gerrymandering — hey, maybe we can do that at the future Constitutional Convention.

Reforming Public School Testing

Creating exams where you can’t study for the test; you can only study.

Carrying Capacity

Governments imagine that they can shape outcomes, and in the short-run, they can.  In the long-run, the real productivity of the economy matters, and only those that can make it without government help will make it.  Whatever government policy may try to achieve, eventually the economy reverts to what would happen naturally without incentives.  There is a natural carrying capacity for most activities, and efforts to change that usually fail.

Actuaries Versus Quants

On why Actuaries are much better than Quants

Neoclassical vs Austrian Economics

Applying math to economics has been a loser.  Who has a consistently good macroeconomic model?  No one that I know.  Estimates of future GDP growth and inflation are regularly wrong, and no one calls turning points well.

The Dilemma of Adding Yield

A quick summary of risk in bonds, and why additional yield is often not rewarded.

The Dilemma of Adding Yield, Redux

On working out the pricing between discount, premium, and par bonds.

Too Much Investment

Investment is a good thing, overinvestment is a bad thing.

Got Cash? (Part 2)

On Buffett and others carrying cash to give themselves flexibility.

Set it and Forget it

On what uneducated investors should do.

Forest Fires and Central Banking

Short piece pointing out that small crises are needed to prevent huge crises.

Match Assets and Liabilities

Total Return Versus Long Liabilities

Cash flow matching has often been sneered at as an investment policy.  I explain why such a view is naive, not sophisticated, and definitely wrong.

The Rules, Part XXXIV

“Once something is used for hedging purposes, it becomes useless for predictive purposes.”

Why I LOVE Blogging

On the downsides of blogging, and why they aren’t so bad.

Higher Taxes, Inflation, Default (Choose One)

Coming to a country near you, and soon!

On the Virtue of Hard Questions for Young Analysts

How young analysts toughen up through hard competitions.

Dealing in Fractions of Sense

On how to reform High Frequency Trading

Yield is the Last Refuge of Scoundrels

Far from offering high price appreciation, it is far easier to cheat many people by offering a high yield, because average people look for ways to stretch their limited resources with a tight budget.

Best of the Aleph Blog, Part 22

Friday, August 9th, 2013

These articles appeared between May 2012 and July 2012:

On Distribution Formulas

Most formulas for distributing income from an endowment or a a savings/investment fund are too liberal.  If you want the purchasing power to last, distribute less.

Correlating Risky Assets

How do correlations come into existence with risky assets.  This piece explains.

Simple Stock Valuation

An exploration of Eddy Elfenbein’s simple stock valuation model.

Don’t Become the Market

When any firm becomes the dominant provider of a good or service, it should ask whether it has mispriced.  A veiled critique of JPM’s whale trade in the credit markets.

In Defense of Nothing

Manufacturing is overrated.  We’ve got enough things, now we need services to make our lives richer.

Little Things are Important

When leverage is high, little things failing can lead to large and bad results.

High Profits

Labor is not scarce, so profit margins are high.  Will that last forever?  No, but it might be a while.

23,401 Auctions

391 Auctions

A pair of pieces suggesting that the markets could be better off if we held auctions once a second, or once a minute.

The Rules, Part XXXII

Dynamic hedging only has the potential of working on deep markets.

Arbitrage pricing can reveal proper prices in smaller less liquid markets if there are larger, more liquid markets to compare against.  The process cannot work in reverse, except by accident

The Rules, Part XXXIII

When politicians don’t have answers, they blame speculators, financiers (Wall Street), or foreigners.  They do anything to take the spotlight off their culpability or ineptitude.

Aim for the Middle

Very basic advice that tells you that the best returns come from taking moderate risk.

Works if Small, Fails if Large

Another bogus theory of asset allocation that works today, because markets favor it, and not enough people are using it.

Strong Hands

On the value of long-term investors holding stocks that you hold.

Logical Links

If there are a lot of links in a chain of reasoning, it is likely to be wrong.

Modified Glass-Steagall

I suggest a number of reforms that would be more effective than reinstating Glass-Steagall.

Don’t Blame Money Market Funds

On the hypocrisy of the SEC and the banking regulators

Do Insurance Stocks Do Better than Average Over the Long-Run?

The answer is probably, but not certainly.  Really, it is a mess.

On Life Insurance and Life Reinsurance

Explains why I like the life reinsurance oligopoly

On Bond Ladders

The most robust strategy for interest rates; always second-best, and never the worst.

On Internal Indexes, like LIBOR

An Analysis of Three-Month LIBOR 2005-2008

On Floating Rates

In most scandals, not enough attention is paid to those who should have been questioning the situation and did not.  There were parties angling for higher LIBOR and lower LIBOR.  Anytime you borrow or lend using an index, you assent to the method of the index.  What, you didn’t analyze it?

The Failure of Government-Provided Prosperity

The government has almost no control over prosperity, and yet it tries to take credit for it, and ends up ruining prosperity through deficits and loose monetary policy.

Grow Embedded Value

The main idea in investing is finding investments that will compound your money at an above average rate, with a margin of safety.

The Education of a Mortgage Bond Manager, Part I

The Education of a Mortgage Bond Manager, Part II

The beginning of my eight-part series on mortgage bonds.  I did it well for three years.

Packages! Packages!

A tale of my younger investing days, when I would mail companies for data.

Missing Earnings Estimates

Why occasional earnings misses are desirable.

Forget Your Cost Basis

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.

Concentrated Interest

This piece generated a lot of heat, but I still stand behind it.  The concentrated interest of a profit motive is a good thing, and all of the government services do not affect what you have done at all.  The entrepreneur is a hero, whether in business, government, or elsewhere.

Best of the Aleph Blog, Part 21

Thursday, May 9th, 2013

These articles appeared between February 2012 and April 2012:

We Eat Dollar Weighted Returns — III

What did a buy-and-hold investor get owning SPY?  7%/year.  What did the average holder get? 0%.  A warning against over-trading.

Against Risk Parity

Against Risk Parity, Redux

Expressing skepticism over a strategy using leverage to extract returns out of lower-yielding asset classes.  Why not but subordinated asset-backed securities instead, and how did they do in the crisis?

Individual Investing Can Be Tough

Individual Investing Can Be Tough, Redux

The investment game is competitive, and I give a few tips on how to avoid the risks.

Musings on the “400% Man”

Understanding small asset managers, and why you might want to invest with them.

Thinking about the Insurance Industry

I take a tour through the insurance industry after the carnage of the credit crisis.

Notes on the 2011 Berkshire Hathaway Annual Report, Part 3 (On Acquisitions)

Lists all of the notable acquisitions of Berkshire Hathaway from 1977 to 2011.  Analyzes Buffett’s strategy, which has been remarkably consistent over 40 years.

Notes on the 2011 Berkshire Hathaway Annual Report, Part 4 (10K Issues)

Goes through the main risks of Berkshire Hathaway.

Replacing Defined Contributions

I propose a hybrid plan that would replace 401(k)s, and other participant-directed DC plans.

The Rules, Part XXXI

The offering of liquidity through limit orders is a real service to the market, and on average gets rewarded in lower overall execution costs.  In choppy markets, it can really add value.

Buy-and-Hold Can’t Die

Buy-and-Hold Can’t Die, Redux

Explains how every investor (even speculators) has the option of holding on  for a long time, and why that can be valuable.

The Anti-Consultancy Consultancy

Call me, and I will tell you to fire the consultant, and listen to your middle managers.

Easy in, Hard out

It is always easier to loosen monetary policy than to tighten it.  The next tightening cycle will be particularly rough, should the Fed ever choose to do it.

Gold does Nothing

This post got a lot of play over the internet.  I was really surprised at how much response it received.  Gold has few industrial uses, but is pretty; that’s why it is so interesting.

Misunderstanding the Tax Debate

Misunderstanding the Tax Debate (II)

The debate should be about what income is, and not about what the rates should be.  Wealthy people have clever advisers that minimize “income.”  Doesn’t matter what the tax rate is.  The debate should focus on income.

Simple Retirement Calculator

Gives a simple way of analyzing whether you have saved enough or not.  Quick answer: you haven’t saved enough, particularly for the wretched investment environment that we are in now.




Best of the Aleph Blog, Part 20

Wednesday, May 8th, 2013

These articles appeared between November 2011 and January 2012:

The Foul Deed of the SEC in 2004

Why the SEC is to blame, and not to blame, regarding the net capital rule.  They changed little in 2004, but should have been more aggressive than that.

Bubbles are Easy to Spot, well almost…

How to spot bubbles, and why our world is so messed up from an unwillingness to takes losses on bad debts.

At the Cato Institute’s 29th Annual Monetary Conference (Epilogue)

My thoughts on monetary policy versus the many odd people who come to the conference.

A Large Middle Class Isn’t Necessarily Normal

After all, across human history, middle classes have been abnormal.  Why should they be regarded as normal now?  Has something fundamentally changed?  Lotsa flame-mail on this one. Hot!

Valuing Behemoths

Valuing Behemoths, Redux

On the issues regarding cheaply valued companies where the equity is worth more then $100B.

Improve the Position

We are no good at choosing the best assets, but we are better at choosing assets that are better than what we currently hold.

The Gold Medal Gold Model

I take Eddy Elfenbein’s model and apply regression to it.  The results explain what affects the price of gold — the real cost of carry.

Peak Credit

What I write here will not be rigorous.  We’ve heard about “peak oil.”  We’ve heard about other resources, and how production will decline over time.

But what of credit? It isn’t that hard to create, but it is hard to create well, particularly when debt levels are high, as in this environment.

The Rules, Part XXVIII

Rebalancing of any sort in investing presumes an underlying stability to the economic system, and thus, market returns.  Rebalancing will not protect against socialism, war, or an overleveraged position.

The Rules, Part XXIX

Risk premiums should never be capitalized, they should only be taken into income as earned.

The Rules, Part XXX (30)

In the recent run-up, there was talk of the infallibility of equities.  This led to a higher level of variable compensation in the economy through option and share issuance and low pressure to raise fixed wages.  This was yet another form of hidden leverage, which hid the unprofitability of enterprises through share dilution.

Stock Prices versus Implied Inflation

Stocks, at least in this environment do better when inflation implied by TIPS rises.

Permanent Asset Allocation

An attempt to explain why Harry Browne’s asset allocation idea works, at least until many realize it, and send gold shooting through the roof.

Too Many Par Claims versus Sub-Par Assets

This sums up the problems of our world today.  Everyone wants to be paid back in full, but many are “bust” and cannot repay.

On Predicting the Future

I reverse-engineered ECRI, and the response is minuscule.  This took a lot of work, and was controversial.

Against Simple Valuation Metrics

On the value of dividends, buybacks, acquisitions, and organic growth.

On Opaque Transparency

After a certain point, the more data you reveal, the harder it gets to evaluate what is going on.  Far better to reveal to the public the core data that explains policy than to make them slog through big data releases.

And in those cases, what is not revealed is the most important data.

Best of the Aleph Blog, Part 19

Tuesday, May 7th, 2013

These articles appeared between August and October 2011:

Take Prudent Risk

One of the great secrets of investing is taking moderate risk.  High risk fails on average, because those swinging for homers make a lot of strikeouts.  Low risk fails because there is little reward.

De Minimus Laws, Redux

I catalog all of the de minimus laws for Registered Investment Advisers.  Only Texas and Arkansas require registration on the first client.  The rest require it on the sixth client.

How Would You Run a Rating Agency?

Points out the incompatible standards that rating agencies are encouraged to achieve.  It is a no-win situation.


There is no escape.  There will be a crisis.  Do you want a smaller crisis sooner, or a bigger crisis later?  The actions of our government say, “A bigger crisis later, much bigger and later if possible.”

The Rules, Part XXIV

Every excess eventually unwinds.  When an excess unwinds, the fall gets exacerbated by trend-followers blowing out of mutual and other pooled funds with lousy relative performance.

Leverage Isn’t Free

A critique of risk parity.  This is implicitly the same idea behind securitization, but it does not get the same criticism.

The Predictions of Michael Pettis

Few global macroeconomists are as perceptive as Michael Pettis.  I have learned a lot from him over the years.

The Folly of Large Acquisitions

I explain what most tends to improve the value of companies with respect to the use of free cash flow.

The Rules, Part XXVI (Efficiency vs Stability)

T+1 will raise volatility.  Often increases in the technical efficiency of information or trading systems increase volatility, because people can act precipitously on information, all at the same time.

Missed Opportunities

The Federal Reserve was the primary architect of the debt bubble that we are now wrestling with.  It is the main reason that we need to eliminate the incompetent, overstaffed Fed.  (Lay off anyone that has a Ph. D.  there.  Dangerous idealists who have little contact with reality.)

On High Correlations

I explain why high asset correlations have to be bearish indicators.

How Do I Find a Job in Finance?

How Do I Find a Job in Finance? (Part 2)

I have helped many people get jobs in finance.  Most of my useful advice is in these two articles.

On Multiparty Transactions

My simple rule to average people when involved in complex transactions is this: be cynical.  No one is interested in your well-being, and most of the transactional terms are skewed against you.  To the extent that you can borrow less, and eliminate some of the parties that would be a part of the transaction, it is to your good that you do so.  The best situation is that you buy for cash, if you have it.

Debt Relief

The main thing holding back our world from recovery, is no one wants to take losses from bad debt, and so central banks extend a lot of credit, as if those pointy-headed intellectuals have any idea about how the economy really works.

Build the Buffer

There are advantage to having surplus cash around.  You can get discounts and minimize risks.

Financial Complexity, Part 1

Alas, there is no part two to this piece.  But this piece explains why financial markets are often not efficient.

The Retirement Bubble

We know we should save for retirement, but we don’t.  That applies to governments, corporations, and individuals.

We Eat Dollar-Weighted Returns

Explains how the average person did poorly investing with Bill Miller, while the few buy-and-hold investors did pretty well.

On Social Media, and How I Built my Blog, Part 1

On Social Media, and How I Built my Blog, Part 2

I divulge almost all of my tricks for building a good blog.

Improving Publishing in the Social Sciences

I adapt the concept of double-blind studies to the social sciences.  It would definitely improve the quality of the research.

Occupy Your Time Productively

I got a lot of hate mail over this, but my main point was that protesters should organize, and form a political party or something like it (think of a leftist version of the Tea Party).  The Occupy movement was lazy, and the results of their actions were minimal.

Best of the Aleph Blog, Part 18

Saturday, September 8th, 2012

These articles appeared between May and July 2011:

Most People are not Better off Buying Common Stocks on their own


Why Amateurs Should Invest in Common Stocks

Yes, I wrote them both, but they complement each other.  Yes, most average people get skinned investing in common stocks, but if you apply yourself assiduously to investing, it will improve your performance in other jobs, by broadening your skill set.

Impossible Dream, Part 2

Impossible Dream Project, Part 1

The latter of (part 1) these was my highest day and month for access of my blog.  I came close to eclipsing the monthly total last month, but missed by 2%.  These pieces take up asset allocation via valuation, and momentum.

Learning Leadership

A story of how Roy and I disobeyed orders a little, and created a lot of growth for the company that we served.  Personally, I think this is a great story… I never created more value than when I worked for Provident Mutual.

On Longevity Derivatives

I like to think that I am an intelligent skeptic on derivatives; in this case credit risk fights any real hedging.

Segmenting to Make Better Decisions

The smaller the range of choices is, the better people do in choosing.  One way to facilitate that is to break down decision making into a series of choices with each having few options.

The Rules, Part XXI

All assets represent future goods.  The prices of assets represent the trade-off between present goods and assets.

The Rules, Part XXII

Rapid money supply growth with no consumer price inflation can only really occur within the confines of an asset price bubble, or else, where does the money go?  Interest rates are low at such a time because of the incredible liquidity, and complacency of lenders that they will get an equal amount of purchasing power back.  Perhaps another possibility is when a country’s currency is being used more and more as a shadow currency, like the US in the Third World.  But even that will come home someday.

Learning to Like Lumpiness

This is probably one of the most important articles I have written, because investment returns are lumpy, and we need to learn to live with it.  For those of us that are smart, we need to take advantage of it.

What is Liquidity (V)

Liquidity cannot be created, but it can be redirected.

Got Cash?

Cash is valuable even when interest rates are low.  Cash is flexibility and optionality.

Enduring Ponzi

Madoff’s Ponzi scheme lasted so long because it raked off so little.

The Costs of Illiquidity

On the tradeoff of liquidity in order to get yield.

Silent as Night

It also taught me a lesson.  When fees are deducted daily, no one notices.

“Is He Economically Rational?”

Now after all of this, it’s not so much a question of rationality but ethics.  Who will do the right thing for the one he ultimately serves?  Working for those people is a joy, and is beneficial to those that own. Doing right does well for many.

Downgrade Jitters

On why credit ratings are opinions, and not facts.

Where to Hide?

How to preserve purchasing power, even when it is difficult.

The Costs of Illiquidity — II

Don’t buy REITs that are not publicly traded.


Best of the Aleph Blog, Part 17

Tuesday, June 19th, 2012

These articles appeared between February and April 2011:

On the Percentage of Market Cap held by Domestic Stock ETFs


  • Domestic stock ETFs tend to pick more volatile stocks.
  • Domestic stock ETFs tend to pick stocks held by major institutions.
  • Domestic stock ETFs tend to pick stocks less held by insiders.  (They tend to be more boring.)

Goes Down Double-Speed

Bear markets move at 1.9x the rate of bull markets. (double speed)

Consider the Boom in the Bust; Consider the Bust in the Boom

We would all be better off if policymakers thought at least half a cycle ahead in the credit cycle. Sadly, they are linear thinkers, and would be better off working at the county landfill, if they qualified for such authority.

Critical Analysis of Buffett’s Annual Letter

Critical Analysis of Buffett’s Annual Report

Analyzes Berkshire Hathaway in 2011.  Points at the growth in debt at BRK, and concentration risk in the subsidiaries.

Musings on Yield

Why you should not use yield as a criterion for investment.

On the Usefulness of Yield Spreads

So what does this tell us?

  • There is a credit factor that effects yields, and the effect on Baa bonds is roughly 1.5x that of Aaa bonds.
  • As Treasury yields get lower, Baa bond yields rise at roughly 45% of the rate.  There is the nominal yield need — even Baa bonds tend to need a certain nominal yield, particularly for 20+ year bonds.
  • Present yield levels are fair for long Baa bonds, to the extent that Moody’s measures them accurately.

On Con Men

So avoid complex investments.  Particularly avoid investments that you don’t understand.  At minimum, find a competent friend, or some neutral party that will look at the deal.  If you can’t find such a friend/party, don’t do the deal.  The friend is important, because he does not want you to come to harm, or lose you as a friend if things go bad.

Three Years from Now

There are real advantages to managing for the intermediate term.

Responding to a Bright Reader

Why I started a bond product.

Things are not as good as they look

Analyzing economic statistics when they don’t sound right.

Limits: Models, Governments, and Central Banks

Most writers say the governments and central banks are all-powerful.  I disagree, and I try to explain why.

Regarding David Sokol

Regarding David Sokol, Redux

Regarding David Sokol, Part 3

Regarding David Sokol, Part 4

The growing sentiment, though ahead of the crowd, that David Sokol should leave Berkshire Hathaway.

Everything Old is New Again in Bonds

On unconstrained mandates and managing for total returns with bonds.

When I was Young

What I went through in investing in my younger days.  Taught me a lot.

When Everything is Strong

When Everything is Strong, Redux

When the only thing weak is high quality bonds, what do you do?

It Would Have Happened Already, Redux

What do you do when all you hear are consensus opinions?


The Best of the Aleph Blog, Part 16

Saturday, June 9th, 2012

I try to do “The Best of the  Aleph Blog” pieces between 1-2 years after original publication.  Why?  It gives time for reflection, time for series to complete, time for me to be proven wrong/right, etc.  I would have preferred that readers do this job for me, so that I could be neutral, but I realized that I am the one that has the most concentrated interest in doing this, so that is why I do this.  The main benefit for me in doing this is when I submit free content to “Wall Street All Stars,” I know what I think is good stuff, and I utter a few words to explain how my wisdom has proven right, or fell on its face.

This episode covers the era of November 2010 through January 2011.

On Investment Modeling, Part 1

On Investment Modeling, Part 2

On Investment Modeling, Part 3

On Investment Modeling, Part 4

Investment modeling is tough, you omit some bits of reality, and deny other bits of reality.  In this four-part series, I try to explain how difficult good modeling is, and how to make it better.

Flavors of Insurance, Part I

Flavors of Insurance, Part II (Life)

Flavors of Insurance, Part III (Personal Lines)

Flavors of Insurance, Part IV (Commercial)

Flavors of Insurance, Part V (Reinsurance)

Flavors of Insurance, Part VI (Brokers)

Flavors of Insurance, Part VII (Health)

Flavors of Insurance, Part VIII (Financial)

Flavors of Insurance, Part IX (Title)

Flavors of Insurance, Part X (Conglomerates)

Flavors of Insurance, Part XI (Banks and the Insurance Business)

Flavors of Insurance, Part XII (Summary — The End)

This was a unique series where I tried to bring my expertise to bear on a complex industry.  I wrote the original piece in 2003, and it never got published.  I used OCR to scan it and one of my brighter children to edit it, so you have my original text, plus my commentary in 2010, pointing out where I was right and wrong.

Time to Grow Up

I am an advocate for a brainy libertarianism that reflects the intelligence embedded in the Bible, coming form the Creator Himself.  I do not back what the t-party has to say, whose positions reflect personal selfishness.

Nonidentical Twins: Solvency and Liquidity (III)

Now, when a government is overleveraged, but interest rates are low, the situation is potentially unstable.  A rise in rates could tip the scales.  Market actors would conclude that they can’t survive at rates high than a certain threshold, so sell the debt now, in case rates would get so high.  That action forces rates higher, leading to a self-reinforcing panic.

Sometimes this happens in advance of a debt refinancing, leading some politicians and bureaucrats to say the forever bogus phrase, “This is not a solvency crisis, this is a liquidity crisis.”  Sorry, if you play near the cliff, don’t complain if you happen to fall off.

Liquidity crises do not happen to governments with low debt levels.  Liquidity crises are solvency crises during the panic phase, before they are revealed to be solvency crises alone.

The Value of Fair Accounting

Why fair value accounting has value to investors.  This should be a “duh” moment, because everyone should understand this.

2010 Financial Report of the US Government

My annual post on the topic, describing the deterioration of the situation.

A Portrait of Maryland’s Public Companies

I explain why Maryland, my adopted homestate, has the mix of publicly traded companies that it does.

Why We Don’t Need the Fed

We would do better with a commodity standard, and even a gold standard.  The Fed hoodwinks us with its pretended efforts to maintain value.  I genuinely mean that we could do better without the Fed.  Put James Grant and Steven Hanke in charge of our monetary policy, and we will do well

On Human Fertility

A controversial topic, but fertility rates are falling more rapidly than the demographers expect. Why? It is politically correct to say that the planet is running out of resources, a bogus idea, but often stated.  As it is, because of changes in the way that women and men view their roles, fewer children will be born.

And as for a guy who has sired three children, and adopted five (far more difficult), I would simply say that we are better off with more children in homes that care about the results of how children turn out.

The Best of the Aleph Blog, Part 15

Thursday, May 10th, 2012

This stretches from August 2010 to October 2010:

The Education of a Corporate Bond Manager, Part VII

On the value of credit analysts.

The Education of a Corporate Bond Manager, Part VIII

On price discovery in dealer markets, and auctions gone wrong.  I never knew that I could haggle so well.

The Education of a Corporate Bond Manager, Part IX

On the vagaries of bulge-bracket brokers, and how a good reputation helps on Wall Street.

The Education of a Corporate Bond Manager, Part X

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. ;)

The Education of a Corporate Bond Manager, Part XI

On my biggest mistakes in managing bonds.  Also, on aggressive life insurance managements.

The Education of a Corporate Bond Manager, Part XII (The End)

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.

Queasing over Quantitative Easing

Queasing over Quantitative Easing, Redux

Queasing over Quantitative Easing, Part III

Queasing over Quantitative Easing, Part IV

Queasing over Quantitative Easing, Part V

Queasing over Quantitative Easing, Part VI

The problems with the Fed’s seemingly “free lunch”strategy.  Pushes up asset prices and commodity prices, benefiting the rich versus the poor.

The Economic Geography of Publicly-Traded Companies in the United States by Sector

The Economic Geography of Publicly-Traded Companies in the United States by Sector (II)

Shows what US states have diversified vs concentrated economies by sector, and what states dominate each sector.

Portfolio Rule One

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.

Portfolio Rule Two

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.

Portfolio Rule Three

Stick with higher quality companies for a given industry.

Portfolio Rule Four

Purchase companies appropriately sized to serve their market niches.

Portfolio Rule Five

Analyze financial statements to avoid companies that misuse generally accepted accounting principles and overstate earnings.

Portfolio Rule Six

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.

Portfolio Rule Seven

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.

Portfolio Rule Eight

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.

The Portfolio Rules Work Together

How the portfolio rules work together to create a “margin of safety.”

The Rules, Part XVIII

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.

The Rules, Part XIX

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.

 The Rules, Part XX

In the end, economic systems work, and judicial systems modify to accommodate that.  The only exception to that is when a culture is dying.

 Managing Illiquid Assets

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.

Of Investment Earnings Assumptions and Century Bonds

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.

Who Dares Oppose a Boom?

This piece won a small prize, and in turn, I received three speaking engagements.

Fairness Versus Economics

Fairness Versus Economics (2)

People care more about fairness than improving their own economic/social position.

Earnings Estimates as a Control Mechanism, Flawed as they are

Earnings Estimates as a Control Mechanism, Flawed as they are, Redux

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.


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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