Tonight’s topic comes from a note sent to me by a friend. Here it is:

David, I have heard you say that you have entered into partnerships in the past.  What are your rules for partnerships, who will you enter with?  I have a neighbor who is interested in starting a business, the start up cash is small $5000.  I think there might be good opportunity, but I am concerned for good reason about my time availability, as well as Not being “unequally yoked”.  What business relations do Paul’s words govern.  do you have different rules for minority, majority, or controlling shares?

I appreciate your thoughts.

I have two “partnership” investments.  One is very successful and is an S Corporation.  The other is a limited partnership, and I wonder whether it will ever amount to anything.  Both were done with friends.

There are a few things that you have to think about with partnerships:

  1. Is your liability limited to the amount of money you invested, or could you be on the hook for more if there are losses/lawsuits?
  2. Are there likely to be future periods where capital might need to be raised?  Under what conditions will that be done?
  3. What non-capital obligations are you taking on as a result of this?  Labor, counsel, facilities, tools, etc?
  4. How will profits and losses be allocated?  Voting interests? How will it be managed? When will the partnership end?  How can terms be modified? How can partnership interests be transferred, if at all?  Etc.
  5. Do you like the people that you will be partners with?  You may be partners for a long time.
  6. Be ready for the additional tax complexity of filling out schedule C, or a K-1, or some other tax form.

Go into a partnership with your eyes wide open, and check everything.  If your partnership interests have limited liability, and the economics are structured similar to that of a corporation, then things are clearer, and you don’t have to worry as much.

Take note of any obligations that you might have that don’t fit into the “passive provider of limited capital with proportionate ownership” framework.  Those obligations are the ones that need greater scrutiny.  Include in that how those working on the partnership get compensated for their labor.  Parties to the partnership may have multiple roles, and there can be conflicts of interest — imagine a partnership where one partner works in the business and receives a large salary, thus depressing profits for the non-working partners.  How does that conflict of interest get settled?  (Note that the same problems that exist in being an outside, passive, minority public stock investor reappear here.)

Also be aware of how ownership interests can change, and whether you may be forced to add more capital to maintain your proportionate interest in the business.

Try to have a good sense of the skill of the partner or employee managing the business.  That makes all the difference in whether a business succeeds.

Most of what I say here assumes that you will not be a controlling majority partner, and that you will have limited influence over the business.  If you do have control, the problems of getting cheated by someone else go away, but get replaced with the problem of making sure the business is run adequately for the interests of all partners.  Your ethical obligations also expand.

You mention the “unequally yoked” passage from Second Corinthians 6, verses 14 and following.  In one sense, that doesn’t have much more application here than it does in all investing if one is a Christian.  Don’t involve yourself in businesses that of necessity involve you in things that you would not do yourself as a Christian.  Don’t invest in enterprises where it is obvious that management does not care about ethics — you can see it in their behavior.  This will be a little clearer and close to home in a partnership with a friend — you will know a lot more about what is going on.

With a non-limited partnership, there is an additional way the “unequally yoked” passage applies.  You expose your entire economic well-being to risk when you are a general partner.  It is like a marriage — it is very difficult to negotiate your way out of the unlimited guarantee that you make there.  It is like being a co-signer, which the Bible says to avoid.

Of itself, that doesn’t expose you to the unequal yoke, but when you are in an economic agreement that binding, if your partner takes the business in an ethical direction you find dubious, you will be in a weak position to do something about this.  There is where the unequal yoke appears amid unlimited liability.

That’s all for now.  There’s a lot more to consider here, but this is meant to be an introduction to the issues involved in partnerships.  Hope it works well for you.

I imagine the SEC (or the Fed, IRS, or the FSOC) saying: “If we only have enough data, we can answer the policy questions that we are interested in, create better policy, prosecute bad guys, and regulate markets well.”

If they deigned to listen to an obscure quantitative analyst like me, I would tell them that it is much harder than that.  Data is useless without context and interpretation.  First, you have to have the right models of behavior, and understand the linkages between disparate markets.  Neoclassical economics will not be helpful here, because we aren’t rational in the ways that the economists posit.

Second, in markets you often find that causation is a squirrelly concept, and difficult to prove statistically.  Third, the question of right and wrong is a genuinely difficult one — what is acceptable behavior in markets?  Do we run a market for “big boys” who understand that this is all “at your own risk,” or a market that protects the interests of smaller players at a cost to the larger players?  Do we run a market that encourages volume, speed and efficiency, or one that avoids large movements in prices?

This article is an attempt to comment on the Wall Street Journal article on the SEC’s effort to create the Consolidated Audit Trail [CAT], in an effort to prevent future “flash crashes,” like the one we had five years ago.  I don’t think the efforts of the SEC will work, and I don’t think the goal they are pursuing is a desirable one.

People take actions in the markets for a wide number of reasons.  Some are hedging; some are investing; others are speculating.  Some invest for long periods, and others for seconds, and every period in-between.  Some are intermediaries, while others are direct investors.  Some are in one market, while others are operating in many markets at once.  Some react rapidly, and others trade little, if at all.  Just seeing that one party bought or sold a given security tells you little about what is going on and why.

Following price momentum works as an investment strategy, until the volume of trading following momentum strategies gets too high.  Then things go nuts.  Actions that by themselves are innocent may add up to an event that is unexpected.  After all, that is what dynamic hedging led to in 1987.  There was no sinister cabal looking to drive the market down.  And, because the event did not reflect any fundamental change to where valuations should be, price came back over time.

My contention is even with the huge amount of data, there will still be alternative theories, information that might be material excluded, and fuzziness over whether a given investment action was wrong or not.

After that, we can ask whether the proposed actions of the government provide any significant value to the market.  Some are offended when markets move rapidly for seemingly no reason, because they lose money on orders placed in the market at that time.  There is a much simpler, money saving solution to that close to home for each investor: DON’T USE MARKET ORDERS!  Set the price levels for your orders carefully, knowing that you could get lifted/filled at the level.

This is basic stuff that many investors counsel regarding investing.  If you use a market order you could get a price very different than what you anticipate, as I accidentally experienced in this tale.  I could complain, but is the government supposed to protect us from our own neglect and stupidity?  If we wanted that, there is no guarantee that we would end up with a better system.  After all, when the government sets rules, it does not always do them intelligently.

One of the beauties of capitalism is that it enables intelligent responses as a society to gluts and shortages without having a lot of rules to insure that.  Volatility is not a problem in the long run for a capitalist society.

If you lose money in the short run due to market volatility, no one told you that you had to trade that day.  Illogical market behavior, as in 1987 or the “flash crash” could be waited out with few ill effects.  Most of the difficulties inherent in a flash crash could be solved by people taking a longer view of the markets, and thinking like businessmen.

“It’s Baseball, Mom.”

I often spend time watching two of my younger children play basketball, baseball and softball.  They are often in situations where they might get hurt.  In those situations, after an accident, my wife gets antsy, while I watch to see if a rare severe injury has happened.  My wife asked one of my sons, “Don’t you worry about getting hurt?”  His response was, “It’s Baseball, Mom.  If you don’t get hurt every now and then, you aren’t playing hard enough.”  That didn’t put her at ease, but she understood, and accepted it.

In that same sense, I can tell you now that regardless of what the SEC does, there will be accidents, market events, and violent movements.  There will be people that complain that they lost money due to unfair behavior.  This is all a part of the broader “game” of the markets, which no one is required to play.  You can take the markets on your own terms and trade rarely, and guess what — you will likely do better than most, and avoid short-term volatility.

The SEC can decide what it wants to do with its scarce resources.  Is this the best use for the good of small investors?  I can think of many other lower cost ways to improve things… even just hiring more attorneys to prosecute cases, because most of the true problems the SEC faces are not problems of knowledge, but problems of the will to act and bear the political fallout for doing so.  And that — is a different game of baseball.

Photo Credit: Richard.Asia

Photo Credit: Richard.Asia

Recently, I had a client leave me.  I’m not sure why he did — I didn’t ask, because that’s his business.  It *is* his money, after all, not mine.  After deducting the accrued fee, I thanked him for his business, and wished him well.

I try to be low pressure in my work.  I also try to discourage the idea that if someone uses my services, they will do better than the average, much less phenomenally.  I remind potential clients of what happened to stocks in the Great Depression (down almost 90% during a period in 1929-1932).  I ask potential clients to stick with me through a full cycle of the market, but I don’t require it because:

It’s their money.

One thing I do promise them is that my money is on the line in the exact same proportion as their money.  Over 90% of my liquid wealth is invested in my stock portfolio.  I don’t make any decisions for clients that I would not make for myself, mostly for ethical reasons.  But I make sure of it, because I am still my largest client, and I am always on the same side of the table as my clients, aside from my one and only source of revenue, my fee.

It’s their money, but, when it is under my care, it gets the close treatment that my own money receives — no more and no less.

Many wealth/asset managers want as much of a client’s assets as possible.  Me?  I get uncomfortable when more than 50% of their assets are riding on me, but if that’s what the client wants, I will do it if they ask, because:

It’s their money.

Jesus, inverting Hillel, said “Do unto others, as you would have them do unto you.”  That guides my marketing, because I know that many people feel pestered by those who market to them, including those who once they have their foot in the door, now want the whole relationship.  Thus I avoid as much pressure as possible in marketing, and leave it to the good judgment of my clients as to how much they want to entrust to my care, and for how long.

It’s their money.

I don’t pretend to have all of the answers, or even all of the questions.  If one of my clients asks me an unrelated question, and I have the time and expertise to aid them as a friend (i.e., you can’t sue me), I will take some time to help.  They may ask me about what other managers are doing for them, asset allocation, insurance policies, and other things also.  I will give them friendly advice, without any other expectation. I thank them that they are a client of mine — I try to end all of my client letters with that.  In the end, I want them to be happy that they chose me to aid them, and to be happy when they leave as well.

That’s the way I would like to be treated as well — low pressure, transparency of services and fees, and alignment of interests with an ethical adviser who is a fiduciary.

Back to the beginning, aside from the client leaving me, the other reason I write this is all of the pitches I have been getting via e-mail, web, radio, etc., where I say to myself “How can they promise that?” “Doesn’t that break the ‘No Testimonials’ rule?” “Great to be selling advice and seminars — why not start an investment business and prove your theories?”

The investment business has more than its share of those who don’t deliver value, and I labor to be on the positive side of that ledger, as do many others.  Choose those who will treat you as you deserve to be treated, and enjoy the benefits, because:

It’s your money.

Berkshire Beyond BuffettIt’s time to change what Warren Buffett supposedly said about his mentors:

“I’m 85% Ben Graham, and 15% Phil Fisher.”

For those who don’t know, Ben Graham is regarded to be the father of value investing, and Phil Fisher the father of growth investing.  Trouble is, Warren Buffett changed in his career such that this is no longer accurate.  Most of Buffett’s economic activity does not stem from buying and selling portions of public companies, but by buying and managing whole companies.  Buffett is the manager of a conglomerate that uses insurance reserves as a funding vehicle.

As a result, this would be more accurate about the modern Buffett:

Buffett is 70% Henry Singleton, 15% Ben Graham, and 15% Phil Fisher.

Henry Singleton was the CEO of Teledyne, a very successful conglomerate, and one of the few to do well over a long period of time.  It is very difficult to manage a conglomerate, but Teledyne survived for around 40 years, and was very profitable.  Buffett thought highly of Singleton as a allocator of capital, though the conglomerate that Buffett created is very different than Teledyne.

Tonight, I am reviewing a book that describes Buffett as a manager of a special conglomerate called Berkshire Hathaway [BRK] — Berkshire Beyond Buffett.  This Buffett book is different, because it deals with the guts of how Buffett created BRK the company, and not the typical and misleading Buffett as a value investor.

Before I go on, here are three articles that could prove useful for background:

The main point of Berkshire Beyond Buffett is that Buffett has created a company that operates without his detailed oversight.  As a result, when Buffett dies, BRK should be able to continue on without him and do well.  The author attributes that to the ethical values that Buffett has selected for when acquiring companies.  He manages to cram those values into an acronym BERKSHIRE.

I won’t spoil the acronym, but it boils down to a few key ideas:

  1. Do you have subsidiary managers who are competent, ethical, and love nothing better than running the business?  Do they act as if they are the sole proprietors of the business, and act only to maximize its long-term value consistent with its corporate culture?  These are the ideal managers of BRK subsidiaries.
  2. Acquiring such companies often comes about because a founder or significant builder of the company is getting old, and there are family, succession, taxation, funding or other issues that being a part of BRK would solve, allowing the management team to focus on running the business.
  3. Do the businesses have sustainable competitive advantages in markets that are likely to be relevant several generations from now?

The beauty of a company coming under the Berkshire umbrella is that Buffett leaves the culture alone, and so long as the company is producing its profits well, he continues to leave them alone.  Thus, the one selling a company to Buffett gets the benefit of knowing that the people and culture of the company will not change.  In exchange, Buffett does not pay top dollar, but gets deals done faster than almost anyone else.

This is a very good book, and its greatest strength is that it talks about Berkshire Hathaway the company as built by Buffett to endure.  If you want to understand Buffett’s corporate strategy, it is described ably here.


Now, my three ideas above *might* have been a better way to organize the book, rather than the hokey BERKSHIRE.  Also, a lot more could have been done with the insurance enterprises of BRK, which are a critical aspect of how the company owns and finances many of the other subsidiaries.

But will BRK do so well without Buffett?  Yes, his loyal son Howard will guard the culture.  The Board is loyal to the ethos that Buffett has created.  Ted Weschler and Todd Combs will continue to invest the public money.  The all-star subsidiary managers will soldier on, at least in the short-run.

But will the new CEO be the person that “you don’t want to disappoint,” as some subsidiary managers think of Buffett?  As a result, how will BRK deal with underperformers?  What new structures will they set up?  Tracy Britt Cool is smart, but will BRK need many like her, and how will they be organized?

Will he be a great capital allocator?  Will he maintain the “hands off” policy toward the culture of subsidiaries, or will the day come when some centralization takes place to save money?

Will Buffett’s replacement be equally intuitive with respect to acquisition prices, and sustainable competitive advantage?

Buffett’s not perfect — he has had his share of errors with textiles, shoe companies, airlines, Energy Future, and a variety of other investments, but his record will be tough to match, even if replaced by a team of clever people.  Say what you will, but teams are not as decisive as a single manager, and that may be a future liability of BRK.

Summary / Who Would Benefit from this Book

Most people will not benefit from this book if they are looking for a way to make more money in their life.  There are no magic ways to apply the insights of the book for quick gains.  Also, readers are unlikely to use Buffett’s “hands off” methods in building their own conglomerate.  But readers will benefit because they will get to consider the building of the BRK enterprise from the basic principles involved.  There will be indirect benefits as they analyze other business situations, perhaps using BRK as a counterexample — a different way to acquire and run a large enterprise.

But as for getting any direct benefit from the book? There’s probably not much, but you will understand business better at the end.  If you still want to buy it, you can buy it here: Berkshire Beyond Buffett: The Enduring Value of Values.

Full disclosure: I received a copy from the author’s PR flack.

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.

Full Disclosure: long BRK/B for clients and myself

Photo Credit -- Javier || Buffett believes in America

Photo Credit — Javier || Buffett believes in America

Yesterday there was an article where Buffett was quoted on getting mortgages to buy houses. Let me quote the most relevant portion:

“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel,California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”

Now, when I read the comment stream on the article, I was not surprised at the level of disagreement, but the vitriolic nature of the the disagreement.  Buffett is certainly not made of Teflon anymore, and fame has led to its share of detractors.

Now, I don’t think that Buffett is giving the right advice to everyone here, but I also don’t think that he is talking his book because has has investments in firms that sell:

  • Real estate
  • Manufactured housing
  • Building materials
  • Mortgages
  • Etc.

Indeed, Buffett has enough investments that almost anything he says could be talking his book.  I think his character is such that he does not talk his book — his firm is one that is built on “low hype” attitudes, at least, low hype for a company of its size and complexity.

Should everyone run out and get a mortgage because it is a cheap time to be borrowing money?  That is an individual question, hinging on how secure and high your income is versus the likely payment on the mortgage, and other housing-related expenses.

The interest rate may indeed be low relative to history, but how well will the economy do in the future?  Maybe residential housing is too expensive in some areas to get a lot of people excited about buying.

Buffett also said:

“Household formation falls off dramatically in a recession, at least initially,” he said. “But that doesn’t last long. Hormones kick in and in-laws get tiresome, too.”

Unless something changes in US culture, there have been changes to the demand for homes, driven by the following factors:

  • People are marrying later and less frequently
  • They are having fewer kids
  • Urban areas are more attractive for many people to live in, reducing commute time and costs.  Even car-buying is affected.
  • There are fewer move-up buyers because of the financial crisis.
  • The ability of lower middle class people to afford homes has been reduced, particularly in high cost of living areas.
  • The financial crisis has ruined the illusion that residential real estate is an investment that can’t lose money.

There may be more reasons, but even though the 30-year mortgage is the cheapest long-term financing that an average person can get, there are more people than before who are not interested in buying a home.  Renting suits their goals fine.

As such, I think Buffett is wrong here, and that borrowing to buy residential housing will not be as prominent as it was in the past.  But I don’t think he has any bad intentions in what he said — he believes in America, and thinks that we will return to the consumption patterns of the past, which relied on too much debt in my opinion.

Final note: I’m getting tired of reading comment streams.  The people there are often too cynical, and too loose with the truth.  Their expectations for what they deserve in this life are also inflated beyond what is reasonable.  Some turn to conspiracy theories to keep themselves from blaming their bad fortune on their own actions.

Buffett is generally a good guy, and a good example as far as businessmen go — he does not deserve the abuse.  I don’t agree with Buffett’s politics, but I don’t think that he is not sincere.

Full disclosure: long BRK/B and WFC

Photo Credit: Michael Daddino

Photo Credit: Michael Daddino

I am mystified at why people might be outraged or surprised that the Federal Reserve does a poor job of overseeing banks.  The Fed is an overstaffed bureaucracy.  Overstaffed bureaucracies always tend toward consensus and non-confrontation.

I know this from my days of working as an actuary inside an overstaffed life insurance company, and applying for work in other such companies.  I did not fit the paradigm, because I had strong views of right and wrong, and strong views on how to run a business well, which was more aggressive than the company that I worked for was generally willing to do.  Note that only one such company was willing to hire me, and I nearly got fired a couple of times for proposing ideas that were non-consensus.

This shouldn’t be too surprising, given the past behavior of the Fed.  In 2006, the Fed made a few theoretical noises about residential real estate loan quality, but took no action that would make the lesser regulators do anything.  It’s not as if they didn’t have the power to do it.  One of the great canards of financial reform is that regulators did not have enough power to stop the bad lending.  They most certainly did have enough power; they just didn’t use it because it is political suicide to oppose a boom.  (Slide deck here.)

As a result, I would not have enacted Dodd-Frank, because I like my laws simple.  Instead, I would have fired enough of the regulators to make a point that they did not do their jobs.  How many financial regulators were fired in 2008-2009?  Do you hear the crickets?  This is the #1 reason why you should assume that it is business as usual in banking regulation.

You won’t get assiduous regulation unless regulators are dismissed for undue leniency.  I have heard many say in this recent episode with Goldman Sachs, the New York Fed, and Carmen Segarra that those working for the Fed are bright and hard-working.  I’ll give them the benefit of the doubt; my own dealings with those that work for the Fed is that most of them, aside from bosses, are quiet, so you can’t tell.

Being quiet, and favoring the powerful, whether it is bosses, politicians, or big companies that you regulate is the optimal strategy for advancement at the Fed over the last 30 years.  It doesn’t matter much how bright you are, or how hard you work, if it doesn’t have much impact on the organization’s actions.

I try to be an optimistic kind of guy, but I don’t see how this situation can be changed without firing a lot of people, including most of the most powerful people at the Fed, lesser banking regulators, and US Treasury.

And if we did change things, would we like it?  Credit would be less available.  I think that would be an exceptionally good thing, but most of our politicians are wedded to the idea that increasing the availability of credit is an unmitigated good.  They think that because they don’t get tagged for the errors.  They take credit for the bull market in credit, and blame everyone except themselves and voters for the inevitable bear market.

Also, if we did fire so many people, where would we find our next crop of regulators?  Personally, I would hand banking regulation back to the states, and end interstate branching, breaking up the banks in the process.

Remember, the insurance industry, regulated by the states, is much better regulated than the banking industry.  State regulators are much less willing to be innovative, and far more willing to say no.  State regulation is simple/dumb regulation, which is typically good regulation.

But whether you agree with my policy prescription or not, you should be aware that things are unlikely to change in banking regulation, because it is not a failure of laws and regulations, but a failure of will, and we have the same sorts of people in place as were there prior to the financial crisis.


I would commend the articles cited by Matt Levine of Bloomberg regarding this whole brouhaha:

A bit more on Carmen Segarra.

Apparently the place to discuss regulatory capture is on Medium. Here is Dan Davies:

Regulated institutions generally have better contacts and relationships with the top central bankers than their supervisors do. And for whatever reason, top central bankers never developed the necessary knee-jerk aggressive response to any attempts to make use of these relationships to affect the behaviour of supervisors.
So banks never need to listen to their line-level regulators because they can always get those regulators’ bosses’ bosses’ bosses to overrule them. Here is Felix Salmon, mostly agreeing. And here is Alexis Goldstein with a litany of Fed enabling of banks. Elsewhere, Martien Lubberink explains the transaction that got so much attention in the Fed tapes, in which Goldman agreed to hang on to some Santander Brasil stock for a year before delivering it to Qatar. He thinks it was pretty vanilla. And Adam Ozimek has a good point:

This American Life ep should lower avg est corruption belief. Goldman and NY Fed secretly taped & all u get is in non-confrontational nerds?


I was asked to contribute to a survey recently, and one question made me think.  It was a question about why don’t more people consult investment professionals, and What keeps them from doing so.  I gave a fairly standard answer for me:

There are two reasons: first, most people don’t have enough income or assets for investment professionals to have value to them. Second, people don’t understand what investment professionals can do for them, which is:

  • They can keep you from panicking or getting greedy

  • They can find ways to reduce your tax burdens

  • They can diversify your assets so that you are less subject to large drawdowns in the value of your assets

After I wrote it, I submitted it for publication, but I wasn’t really happy with my answer.  The thing that left me less than happy are the various tales that I hear where investment advice is subpar, communicated poorly, etc.  Personally, I expect the real reason many people don’t consult investment professionals is fear of a bad experience, which may often stem from a a bad experience that they have had or a friend my have had.

I sympathize with the goals of the CFA Institute’s Future of Finance Initiative.  That said, I think it is a nice-sounding idea that won’t get far.  I have four main reasons why:

  • We don’t have a financial system where all financial professionals have to be under a common ethics code, with additional ethics code sections for areas of specialization.
  • We don’t have a culture among investment professionals that really wants to clean up the system, and talk about abusive practices, such that they become well-known and go away.
  • We don’t have enough of a culture among investment professionals that wants to genuinely educate the investors that want it, and in ways that don’t directly benefit us.
  • Because we don’t have one unified theory of investing, there will be enough gray areas where people will still get hurt by professionals.

On the first point, I would note a recent article of mine on self-regulation financial markets, where I said:

The guy from the National Futures Association emphasized the idea that mandatory membership in the association as a requirement to do business was paramount for an SRO and I can see that.  The SRO then has the “death penalty” hanging over the heads of those they regulate.  That said, consider this: the CFA Institute may dream of the day when all involved in investing *must* hold a CFA Charter.

I have no doubt that this would be a good thing.  Ethics codes are good for the industry, and to kick out bad apples would be a good thing.

On the second point, it would be worthwhile for financial writers and some larger firms to take on common practices that are abusive.  This will be controversial, because not everyone will agree on every item, but even getting a stoplight list where red is bad practices, green is good practices, and yellow means be careful would be a good start.

On the third point, we need to advocate for the best practices even where it doesn’t exactly fit where our businesses make profits.  Think of it this way: it often helps in home repair when someone who comes to fix one thing gives me some free advice on another matter that he doesn’t do, but sees it and tells me.  That builds goodwill for a later date, because I know that person cares about me, and not just what I pay him.

On the last point, my earlier article went over many of the disagreements:

Ethics aren’t neutral; people disagree about what is right and wrong to a high degree.  Even in finance, there are considerable disagreements in what is the correct behavior:

  • Active vs Passive mangement
  • Value vs Growth
  • Does Technical Analysis work?  (Is there truly a single discipline there?  I don’t think so.)

That’s a considerable reason why it would be difficult to enforce the views of the CFA Institute over the markets.  There is no commonly agreed-upon view of how the markets work.  The views of the academics are ridiculous, and do not reflect market realities. But many asset allocators trust them, even though their results are poor.

But even if this results in some squabbles, at least people can be aware that there are differences of opinion, and maybe that can inform the way we talk to clients.  Long only managers should tell their clients to buckle in, because they do not time the markets.  Traders should tell clients that they won’t do well in choppy markets, and that methods to limit losses and let gains run have their limitations.  Time horizons for investment decisions should be clearly identified, so that investors can set their expectations reasonably.

And that could be the best part of this: if investors have a good idea up front of how an investment will likely perform in a variety of scenarios, there will be fewer negative surprises, and hopefully, happy clients.

Anyway, that’s what I think the goals should be.  Now, who else wants to make them practical, and be willing to speak up about this?


Before I start, I would like to remind readers of a Q&A that I did with the author, which is available here. [For readers at Amazon: Google “Aleph Education of a Value Investor”. There are other useful links in the version at my blog.  Wish Amazon allowed for links…]

This is a good book if you know what you are getting and want that.  If you want a book to compare it to, I would class it with Benjamin Graham: The Memoirs of the Dean of Wall Street.  The reason for this comparison is that the book focuses on character development, and spends relatively little time on detailed value investing methods.  It spends a lot of time on the good parts of the lifestyle of a value investor, and this is where the book has its highest value.

Is it possible to “get rich quick?”  I don’t think so, but it is possible to become rich if you focus, make few decisions, but they are the right actions to take.

This book describes the transformation of the author, who went from someone trying to get rich quick in the short-run, and failing, to being an investor who could wait until he had a good idea to invest in, and then concentrate his capital in the best ideas that he had, and succeed.

But getting there was not a linear matter.  First, he had to figure out he was miserable.  Then, he had to find a new way to support himself, handicapped because the last firm he worked for had a bad reputation.

He picked up an interest in value investing, particularly the style that Buffett follows, which led him to a clutch of contacts in the value investing world who would help to shape his view of the world.

Without spoiling the book, some events happened that enabled him to set up his own investment shop where he does value investing for clients and himself.  And as such, he lived happily ever after?

Well, not yet.  He meets one key person, Mohnish Pabrai, who helps him think through the key aspects of his business.  He makes a number of additional friends who are value investors, and he figures out what he is good at analyzing and acting on, and where he is less capable.  Armed with that data, he acts to make his entire life more effective for himself, his family, and his clients.

He moved so that he could be out of the “New York Vortex,” where groupthink can carry you along.  He moved to a quiet area, and set up an office where he could think, and the odds of being disturbed would be low.  He set up an action area and a contemplation area.  He limited electronics to the action area and made it uncomfortable to stay in the action area.  This enabled him to think longer-term, and avoid taking actions because others were doing so.  He also had to learn how to get advice from other intelligent investors, without letting their views short-circuit his thinking processes.

He enjoyed life a lot more.  He also realized he had enough assets to manage, and so he didn’t need to market much, which allowed for a focus on serving current clients well.  About the only thing he needs to do is develop a sell discipline, and that is not an uncommon problem with most asset managers.  [Two of my articles on the topic: one, two.]

Near the end of the book, he shares eight pointers that will improve the investing of most people, if they are willing to think long-term.  I endorse the principles there, though there may be other ways to achieve the same disciplined attitude.  He also gives four case studies that affects the checklist that he uses for making investments.

Now, I have purposely left out the most colorful part of the book, the lunch with Warren Buffett, to the end of this review.  He and Mohnish bid together for the lunch and win.  The main thing he takes away from the affair was how much Buffett focused on his guests, and not on himself.  Indeed, at the end of the book, he credits his relationship with Mohnish in helping him to become more selfless in many of his attitudes.  To him, that is the real prize, much as he has done well as an investor and a businessman.


Can all of ethics be summed up as being farsighted and unselfish?  No.  Those are good things, but the Bible has many more things to teach than that.


This book will help you understand the internal attitudes of some value investors.  It may help you invest to some degree, but that is not the main point of the book.  After all, what is it worth to be a great investor if you aren’t happy?  Being happy as an investment manager is the main point of the book.  If you still want to buy it, you can buy it here: The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment.

Full disclosure: I received two copies from the author’s PR flack.  Good thing too, because someone swiped one of them before I finished reading it.

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.

Okay, let’s run the promoted stocks scoreboard:

TickerDate of ArticlePrice @ ArticlePrice @ 6/27/14DeclineAnnualizedSplits
 8/1/2014 Median-97.2%-89.6%


Now for tonight’s loser-in-waiting: Apptigo [APPG].  This is a company that  until four months ago was a development stage company for selling Irish horses in the US.  This is a company that has never earned any money, and only has positive net worth at present because of raising capital when the prior company acquired Apptigo in a reverse marger, and renamed itself Apptigo.

This is a company that says it will make money off of selling apps.  Well, they have one app at present, and it is called SCORE – Match Maker.  It has a grand total of seven likes at the iTunes Store.  Now let me hazard a guess here, and say that it is difficult to create a broad network for matchmaking.  The value of a network goes up proportional to the square of its nodes.  How will they attract enough attention in the iTunes ecosystem to make  a significant network?  Even if this is a legitimate company, I don’t see how it will be easy to make it work, as the promoter said it would be easy.

The promoter also said this in tiny type:

Important Notice and Disclaimer: Flying Under the Radar Stocks is an independent paid circulation newsletter. This report is a solicitation for subscriptions and a paid promotional advertisement of Apptigo, Inc. (APPG). Flying Under the Radar Stocks received an editorial fee of twenty five thousand dollars from Micro Cap Media Ltd. APPG was chosen to be profiled after Flying Under the Radar Stocks completed due diligence on APPG. Flying Under the Radar Stocks expects to generate new subscriber revenue the amount of which is unknown at this time resulting from the distribution of this report. Micro Cap Media Ltd. paid nine hundred forty-eight thousand, three hundred sixty-three dollars to advertising agencies for the cost of creating and distributing this report, including printing and postage, in an effort to build investor awareness. This report does not provide an analysis of a company’s financial position, operations or prospects and this is not to be construed as a recommendation by Micro Cap Media Ltd. or an offer to buy or sell any security or investment advice. An offer to buy or sell can only be made with accompanying disclosure documents and only in states and provinces for which they are approved. Do not base any investment decision based solely on information in this report. Although the information contained in this advertisement is believed to be reliable, Micro Cap Media Ltd. makes no warranties as to the accuracy of any of the contents herein and accepts no liability for how readers may choose to utilize the content. Readers should perform their own due diligence, including consulting with a licensed, qualified investment professional. Further, readers are strongly urged to independently verify all statements made in this report APPG’s financial position and all other information regarding APPG should be verified directly with APPG Audited financial statements and other relevant information about APPG can be found at the Security and Exchange Commission’s website at It is recommended that any investment in any security should be made only after consulting with your investment advisor and only after reviewing all publicly available information, including the financial statements of the company. The information contained herein contains forward-looking information within the meaning of section 27a of the Securities Act of 1933 as amended and section 21e of the Securities Act of 1934 as amended including statements regarding growth of APPG. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act, statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties.  All forward-looking statements are based upon current assumptions that are believed to be reasonable. In the event any such assumptions turn out to be incorrect, forward-looking statements based upon those assumptions will not be accurate. Flying Under the Radar Stocks presents information in this report believed to be reliable, but its accuracy cannot be guaranteed. More information can be found at APPG’s website (underline emphasis mine)

I actually like this disclaimer, except for the fact that it is in tiny type, while the proclamation of the investment’s fake virtues are in big type.  So, I have a simple proposal for the SEC regarding newsletters like this: the type size of any disclaimer must be as large as the the largest type in the document.

This is fair, and consistent with other laws that regulate “the fine print.”

I emailed the CEO of Apptigo to ask him whether he knew about the stock promotions (there are three going on), and whether the company, its major shareholders, or its management was benefiting from the promotion.  There was no answer, though I wrote to him on Thursday.

Regardless, avoid promoted stocks, dear friends.  No company of any good reputation pays anyone to promote their stock.  Avoid promoted stocks.

Here’s another letter from a reader.  If reading about my faith turns you off, stop reading now, because this will be thicker than usual.

Hi David,

 I’ve just started reading your blog, and greatly enjoy it. I noticed you integrated your faith with your perception of the world and economics/policy. I am a Christian who is attracted to the wonder of the financial markets. So many individuals making so many decisions being affected in so many ways; it can be overwhelming. My question regards how you view financial markets within your faith.

 I was originally going to work at an internship at a hedge fund in 2008. I thought it’d be the dream: making big money! But that summer, when all hell broke lose, the hedge fund closed down before I could even start. Fast forward six years, and I’m working in corporate finance at a non-financial company – nothing to do with the markets. I want to jump back in, but not as a trader. I feel there was some Divine Providence in how I’ve perceived my “close call” with the trading world. I’m currently trying to understand how I can approach careers involving the financial markets that don’t force me to leave my faith at home. How do you approach the world of finance with your faith?

 Thank you so much for taking the time to read this, and God Bless.


Dear Friend,

I went through a similar experience early in my Christian walk, because sadly, I ran into some Evangelicals who denigrated earning money – Evangelical Leftists were more common in the late ‘70s.  Thus, I turned against Finance though I was good at it.  My Master’s thesis anticipated price and earnings momentum, and most quantitative long-short equity hedge funds.  Too bad for me; I aimed at doing development work in the Third World.  As it was, when I figured out that development economics tended to inhibit growth, and its opposite encouraged it, I gave up.  I started a career in finance as an actuary.

When I did that, I realized that I must do many things:

Be a good example to those around me.

  • Be friendly and pleasant to my co-workers.
  • Oppose fraudulent practices.
  • Be honest with those with whom I dealt.
  • Apologize when I sin or make mistakes.
  • Avoid bad language.  That not only means foul language, but also cruel language, even if it is technically clean.
  • Work hard.
  • Learn, learn, and learn.  A dirty secret about Evangelical Christians is that we read more than non-Christians, and have more Ph.Ds per capita.  Okay, the Jews have us beat there, and badly.
  • Avoid working on the Lord’s Day [Sunday].
  • Don’t be afraid about using the Bible as an analogy or as an example.  After all, people cite all manner of garbage as authorities, and the Bible is not permitted?  Is it because the Bible claims universal authority that people want to ban it?  Yes, that is why.  No one wants the Owner of the Earth to remind us of His claims.
  • I was always honest with coworkers about my faith in moments where it was natural, but I never beat them over the head with it.
  • Love your coworkers, and those with whom you interact.
  • Avoid investments in companies that have sinful goals — gambling, illicit sex, etc.  Also avoid companies that try to cheat people.

Practically, the most important thing is to be honest, keep your word, aim for competence, and be faithful in your dealings with others.

Any vocation can be pursued in a worldly or Christian way – most of it is the attitude that you bring to it.  “Whatever you do, do it heartily, as unto the Lord.”

One final note: one time, I was given a very hard time by a boss who was under a lot of pressure.  Nominally, I was his assistant, and so the rest of the team was amazed with what he put me through, while I largely kept a good attitude (it was not perfect).  One of my co-workers, a Christian, came to me privately and asked how I was doing.  I said that I was fine.  She knew me well, and said that she was praying for me, and that the entire staff was astounded that I would put up with what the boss was doing.  I told her that he was the boss, under a lot of pressure, and that if I pushed back, it could do a lot of harm to all of us.  I was not doing it for me.

It made an impression on the staff, and though they liked me, when the boss left six weeks later, they chose me to run the unit.  Truth, management above chose me, but without their support and love, I would not have been half the leader that I was.

So, serve for the good of others, and you will succeed.  “Love your neighbor as yourself.” [Lev 19:18]