Okay, here is tonight’s rule:

The assumption of normality for asset price changes is wrong in virtually every financial market setting.  The proper distributions are fatter tailed and more negatively skewed.

Normality allows researchers to publish, regardless of the truth.

Normality allows risk managers and regulators to pretend that adequate reserves are held against disaster.  It also allows businessmen to achieve acceptable ROEs, while accepting a probability of ruin far in excess of what is prudent.

The normal distribution is a wonderful creation, because it is so simple.  All we need to know is the mean and the variance, which are very simple to calculate.  And… it seems close to fitting a large number of phenomena in nature where the behavior of one party does not affect the behavior of others.

But in economics and finance, the assumption of normality is perpetually violated.  I would guess that it is wrong more often than it is right.  Academics continue to drag out studies assuming normality because it allows them to publish.  academics get statistically significant results more often than they should, because they pursue specification searches, and get to results that they can publish via data mining (and ARIMA error terms — unless there is an a priori reason them, they facilitate specification searches).

And, lest I be accused of being merely biased against academics, this biases me against many businessmen as well.  Many bankers looked at their loss distributions over the prior 25 years in 2007, and assumed that risks were minuscule.  Yes, there were bad periods, but the Fed always rode to the rescue, and losses were low, aside from a few egregious offenders.

Bankers concluded that they could do no wrong, and underwriting suffered.  Rather than looking at more objective measures of risk, bank managements looked at the need to hit their earnings estimates.  Losses had not been large in the past, so the future should be equally good.

When I was a risk manager, I would look at the level of surplus, and would compare it to expected normalized annual losses — if I didn’t have at least 15x normalized annual losses, then I knew I could not survive a reasonably normal spike in defaults at the bottom of the credit cycle, though an assumption of normality, where losses don’t come in bunches, would have allowed me to lever up more.

And I have known my share of management teams that pushed at the risk manager, telling him he was too conservative.  The company couldn’t earn an adequate return on capital at such low levels of leverage.  Equity analysts expected constant growth out of financial stocks, which sadly are cyclical stocks — it is a mature industry, and mature industries are cyclical by nature.  So they added more leverage, and things worked well for a while, until things blew up.

So long as consumers felt that they could add more debt, the bet could go on, with occasional minor interruptions while the Fed mopped up the damage.  But that stopped when the Fed could not drop rates below zero.  Still, the Fed found new ways to subsidize the debts of privileged parties, by buying up their long term debts and holding them.

Look, if you want to regulate properly, you can’t rely on normality.  It does not work in finance and economics.  When looking at loss statistics, don’t look at the mean or the variance.  Instead look at the maximum 3-year loss, and gross it up by 20%.  The surplus of a company should be able to absorb the maximum amount of losses from 3 years, and then some.  I use this as an example rule; tailor it to your needs as you see best.  I used 3 years because the bust phase of when the credit cycle is rarely severe for more than 3 years in a row.

If you want to manage risk internally properly you should think similarly — look at the outliers, and ask whether you can survive something worse than that.  Here’s a personal example: if someone had come to me two months ago and asked me how likely it would be that my area near Baltimore could get 60+ inches of snow in a one week time span, I would have said, “That’s not impossible, but that is way beyond the prior record, which I think is around 30+ inches.  Very unlikely.”  Well, it happened, and five weeks of warmer weather later, my backyard is still half covered by snow.

Markets, like the weather, are far more variable than we would like to admit, and attempts to tame them often lead to suppressed volatility for a time, but with explosions of volatility later, as economic actors begin to presume upon the low volatility as their birthright, and begin to speculate more aggressively, building up progressively more leverage as they go.

So when analyzing risk look at the worst possible outcomes, and build a plan that can handle that.  Size your leverage to reflect that; in a really risky business, you might have no leverage, and extra bits of slack capital in high-quality short-term debt claims.

Finally, remember my analogy of bicycle versus table stability.  A bicycle has to keep on moving to stay upright. A table does not have to move to stay upright, and only a severe event will upend a large table.

I developed this analogy back when I was a corporate bond manager, because there were some companies that would only stay afloat if they kept moving, i.e., if operating cash flow continued at its projected pace. That is bicycle stability; they have to keep pedaling. There were other companies that could survive a setback in earnings, and even lose money for a time, and the debt would still be good. That is table stability.

This is why stress-testing beats value-at-risk in a crisis, and why the insurers came through the crisis so much better than the banks.  When liquidity disappears, strategies that require continued liquidity can cause their companies to disappear.

Better safe than sorry.  Banks should run their businesses using stress tests that will cause them to have lower ROEs because of the additional capital needed to assure solvency.  The regulations have been too loose for too long.

Dear readers, I am now on Twitter — AlephBlog is my moniker if you want to follow me.

I have been somewhat reluctant to do this, but tonight’s post stems from a file on nonlinear dynamics on my computer that I developed between 1999 and 2003 for the most part.  Not so humbly, I called it “The Rules.”   This is the first in a series of what will likely be long set of irregular posts about what I call “The Rules.”  Please understand that I don’t want to make grandiose claims here.  After all, as I once said to Cramer (yes, that one): “The rules work 70% of the time, the rules don’t work 25% of the time, and the opposite of the rules works 5% of the time.”

My best recent example of the rules not working was when the formulas of the quants were blowing up in August 2007.  There were too many quants following the same strategy, and they had overbid the stocks that their models loved, and oversold the ones that they hated.  For a while, the quant models were poison.  Every investment strategy has a limited carrying capacity, and those that exceed the strategy’s capacity are prone for a comeuppance.

Here is today’s rule: There is no net hedging in the market.  At the end of the day, the world is 100% net long with itself.  Every asset is owned by someone, regardless of the synthetic exposures that are overlaid on the system.

There are many people, particularly dumb politicians, who think that derivatives are magic.  To them, derivatives create something out of nothing, and that something is strong enough to smash innocent companies/governments that have been behaving themselves, but have somehow found themselves caught in the crossfire.

First, if a company or government has a strong balance sheet, and has a lot of cash or borrowing power, there is nothing that speculators can do to harm you.  You have the upper hand.  But, if you have a weak balance sheet, I am sorry, you are subject to the whims of the market, including those that like to prey on weak entities.  Even without derivatives, that is a tough place to be.

With derivatives, for every winner, there is a loser.  It is a zero-sum game.  Yes, as crises arise there are always those that look for a way to make money off of the crisis.  And there are some parties willing to risk that the crisis will not be so bad, at a price.  Derivatives don’t exist in a vacuum.  Same thing for shorting — there is a party that wins, and a party that loses.  So long as a hard locate is enforced, it is only a side bet that does not affect the company whose securities are being played with.

When there are troubles, it is because a company or government has overstretched its limits.  You can’t cheat an honest man (or country).  You can take advantage of countries and companies that have overreached on their balance sheets and cash flow statements.

Cash on the Sidelines, Market is Oversold/Overbought, Money is Moving into or out of…

Every bit of cash on the sidelines is matched by a short term debt obligation somewhere.  Now, that’s not totally neutral, as we learned in the money markets crises in the summers of 2007 and 2008.  If the money markets get too large relative to the economy on the whole, that means there is possibly an asset/liability mismatch in the economy, where too many are financing long assets short.  It costs more in the short run to finance long-life assets with long debt or equity, but in the short run you make a lot more if you finance short… do you take the risk or not?

GE Capital nearly bought the farm in early 2009 from doing that.  CIT did die.  Mexico in 1994.  When you can’t roll over your short term debts, it gets really ugly, and fast.  Think of the way we messed up housing finance in the mid-2000s; one of the chief signs that we were in a bubble was that so much of it was being financed on floating rates, or contingent floating rates with short refinance dates.  Initially, that gave people a lot more buying power, at a price of higher unaffordable rates later.  “The phrase, “You can always refinance,” is a lie.  There is never a guarantee that financing will be available on terms that you will like.

This is also a good reason to go for debt that fully amortizes (i.e., when you get to the end of the loan, the payments haven’t risen, and the loan pays off in full).  I’ve never been crazy about the way commercial mortgage loans don’t fully amortize.  I know why it happened this way.  A) in the late ’80s and early ’90s, insurance companies were issuing GICs by the truckload, and needed higher yielding debt with a 5-year maturity.  Voila, 5-year mortgage loans with a balloon payment.  For the real estate developers, the loans were cheaper, but they had to trust that they could refinance — an assumption sorely tested in the early ’90s.  After the death of many S&Ls, a few insurers and developers, and the embarrassment of a more, borrowers and lenders became a little more circumspect.

But the loss of the S&Ls left a void in the market.  The Resolution Trust Company created some of the first Commercial Mortgage Backed Securities [CMBS], that Wall Street then imitated, filling in the void left by the S&Ls.  But to make the securitizations more bond-like, for easy sale the loans were 10-year maturities with a balloon payment at the end.  That way the deals would closer at the end of ten years.  Maybe some of the junk-grade certificates would be stuck at the end with a some ugly loans to work out, but surely the investment grade certificates would all pay off on time.

And that is a big assumption that we are going to be testing for the next five years.  Will developers be able to refinance or not?

This has gotten long, and have more to say, but I’m going to a wedding of a friend, and must cut this off.  Let me close by saying there is a corollary to the rule above, and it is this:

Long-dated assets should be financed by non-putable long-dated liabilities or equity.  Don’t cheat and finance shorter than the life of the assets involved.  There is never an assurance that you will be able to get financing on terms that you will like later.

If you have to invest a lot of money, you have to think differently than the average investor.  The average investor thinks he can easily get in and out of positions.  Really large investors, if they are doing more than indexing, act like private equity investors, realizing that they are buying large chunks of nontradable businesses.  So, when I wrote the piece, The Forever Fund, I wrote it in view of the fact that Buffett’s job is a hard one — most of us have enough trouble generating returns off our small portfolios, but Buffett has to do it in size.

My summary of what he is trying to do can be summarized in one sentence: “A business with a big moat, financed by cheap insurance float, will lead to book value growth.”  Moat — the business possesses sustainable competitive advantages that are significant.  It would be very difficult to reverse-engineer the competitive position of such a business.  Float — ordinarily, property-casualty insurers lose money on operations, but make it up on investing the funds that exist because of the delay in time between premium payments and claims.  Buffett calls that cost “float,” and indeed over the last seven years, Berky has made money on the insurance operations, far from it being a cost.  All the better as he invests the funds generated from insurance operations in businesses that will generate a growing stream of earnings in businesses that have sustainable competitive advantages, such as Burlington Northern and his utility investments.

We hear too much about Buffett the investor, and too little about Buffett the businessman and insurance CEO.  In the old days he was the former — today he is the latter.  He is trying to create a stable of superior operating businesses that can benefit from the cheap financing that the insurance companies generate.

That is a tough job — he is thinking about how he can preserve value forever.  I am reminded of King Solomon who wrote Ecclesiastes, because my family is reading it in family worship presently.  He agonized about how he could preserve what he had built in his life after his death and concluded in sorrow that there was no way to do that.  Again from Ecclesiastes 9:11 [NKJV]– I returned and saw under the sun that—

The race is not to the swift,
Nor the battle to the strong,
Nor bread to the wise,
Nor riches to men of understanding,
Nor favor to men of skill;
But time and chance happen to them all.

Buffett is one among several billion, trying to fight the vicissitudes of this life after he dies.  Like Solomon, he wants what he has built to live a long and prosperous life.  Alas, we can assure nothing even while we live, how much less after we die?  Buffett is likely doing better than most who confront the problem, but the problem remains.

Thus, my view of Berkshire Hathaway is that it is more critical as to who is the CEO/COO rather than who is the Chief Investment Officer.  The greater need is to manage the businesses, rather than manage slack cash for high returns.

-==-=-=-=-=-=-=-=–==–=-==-=–=-=-==-=-

Among all the commentary regarding Berky’s annual report, there has been a dearth of comment about them entering life reinsurance.  Personally, I think their best move would be buying RGA at book value.  (Yes, I own some RGA.)  Why shouldn’t the best life reinsurer be a part of Berky?  There is a talented management team, and the best firm dealing with facultative life reinsurance.  Berky is already reinsuring some major life insurance risks, but who are they reinsuring?

One thing I appreciate about Berky is that they don’t purchase reinsurance.  They size their appetite for a risk relative to their own balance sheet.

-=-===–===-=-===–===-=-=-=-=-=-=-=-

On page 7 of the Berky Shareholders Letter, there is a joke about buying higher.  It is really tough to buy more of some stock that you have bought at a lower level.

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

In the long run the risk for Berky is that it gets a manger that does not get  my summary, “A business with a big moat, financed by cheap insurance float, will lead to book value growth.” But in detail, there is the possibility of a loss of focus.  Can Berky motivate managers to perform?

That is the tough question.  While Buffett lives, there is the “You don’t want to disappoint him” effect, but that will disappear after his death.

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

It is impossible to assure  value permanently, but men will try to do it anyway, and fail mostly….

Full disclosure: long RGA

I know I have written about ideas like this before, but I cannot remember where.  Let me start with a story.  I was at a Society of Actuaries conference in 2001 when I bumped into an actuary who was well-known to most before a meeting.  She recognized me, and I asked her what she was seeing that was new.  She told me, “Liquidity Derivatives.”

I shook my head for a moment and said, “Wait a minute, you mean getting a counterparty to pay cash at a time when liquidity is scarce?”  She giggled and said “Yes.”  I continued, “But wait, who would offer to pay at a time when liquidity is scarce?  She said, “That’s the problem.”  The speaker started to talk, so our conversation ended.

That is why I am skeptical about crisis derivatives.  Felix has commented on this, and he is worth a read here.  Unlike many, I do not think that all events in life can be hedged or insured.  In major disaster situations, no one can marshal the resources to make up for the disaster.  No one can insure against property damage in a war.

Citi has its own index of financial stress.  Here it is over the last 13 years:

Surprisingly, Aleph Blog has its own proprietary index for the same thing.

The graphs go the opposite way, but the correlations are over 80% in absolute value terms, and I can tell you that my measure more directly covers what Citi is going for, because it is the difference between the yield on the two-year Treasury and an index of A2/P2 commercial paper.

So, do you want to be able to fund yourself in a crisis?  Do the following: buy two-year Treasuries, and sell short A2/P2 commercial paper.  Most of the time this is a costly trade, if you can get it done at all.  But access to financing during a crisis is valuable, and should require compensation in advance to obtain it.

As for the Citi product, they should ask the question, “who would be willing to part with liquidity during a liquidity crisis?” and ask the question “Are they unquestionably solvent?”  Insurance is no good if the insurer is insolvent.  If Citi is the counterparty, I for one would not be comfortable.

Let me summarize.  Liquidity derivatives are not a reasonable product.  You never want to be asking for something when it is in scarce supply, because the odds are it will be very difficult to deliver.

Insurance is probably the most complex industry as far as accounting goes.  Why?  When you sell the policy, you have a vague  idea of what the costs will be, and when those cash flows will occur.

That leaves room for a wide variety of games as far as the accounting goes.  Because hitting operating return on equity targets is often the “be all” and “end all” of management reporting, one of the holy grails was taking capital losses and turning them into operating income.  Net result on income is zero, but it looks like you are making a lot of returns off of operations.

At one company that I worked for, the new CEO want to great pains to declare how ethical the new CFO was.  I murmured to my boss, “Not ethical, but clever.”  He gave me a smile.  She had pulled that very trick, and if one reconciled the Statutory and GAAP accounting, the chicanery was obvious.

At AIG, my managers were quite concerned about what went above the line and below the line.  If an accounting item didn’t figure into net income my managers didn’t care about it, even if it diminished shareholders equity.

As an investor, this made me skeptical about income statements.  But if you don’t have an income statement, what do you do to estimate profitability?

Well, you could look at the change in tangible net worth due to common shareholders, and add back dividends, including the value of spinoffs, and net money spent on buybacks.  That is what a shareholder earns, in book value terms.  Back when I was an analyst of the insurance industry, there were companies run by value investors that would present their returns that way showing the the growth in fully converted book value over time.  In a sense , Berkshire Hathaway does that as well, but it doesn’t pay a dividend, so it is simply the increase in book value.

In the short run the market is influenced by net income due to common shareholders.  But there is a difference between the two measures of income, and I call the difference “cram.”  Cram is the amount of extra income reported through the income statements that does not makes its way through the balance sheet.

That said, I have another measure that I nickname “jam.”  Jam is the amount of money gained/lost from buying back stock.  In general, when companies buy back stock they dilute value for investors.  Better to retain and reinvest.

How do I know this?  I have been working on an accounting quality model, which is still a work in progress.  An aside, I have had my share of calls from consultants who tell me they have an earnings quality model that covers the whole market.  When they call me I ask them how they analyze financial companies.  I get the intelligent equivalent of a shrug.  The reason is that accruals on the financial statements of industrials and utilities are quite similar, but for financials, they are quite different.

Here are some of the results of my model on the S&P 100:

The data covers the last 4 3/4 fiscal years.  Why did I use fiscal years? Because data capture with companies is most complete at fiscal year ends, when they file their 10Ks.

What did I find?  In general, most companies lose money off of buybacks, whether it is 24% of cumulative net income, or 32% of final tangible net worth.  Individual company performance varies a great deal.  More surprising to me was that cram on average was only 1% of cumulative net income.  Maybe GAAP isn’t so bad on average after all.  But averages conceal a lot of variation — I would not want to own companies that lose a lot of money off of buybacks, or those that inflate net income versus growth in tangible book.

If buybacks ceased, companies might have a lot of slack assets on hand.  I know that companies keep themselves slim to avoid takeovers,  A large amount of slack assets invites others to come in and buy the assets to manage them.  Still, it seems that most buybacks waste the money of shareholders.  This seems to be another example of the agency problem, wheremanagers take an action that benefits them, but harms shareholders.

I would be negative on both cram and jam.  Good companies don’t report earnings in excess of what shareholders obtain, and they don’t buy back stock except when it is cheap.

Full disclosure: long ALL COP CVX ORCL PEP

I have long been a fan of immediate annuities, particularly those that are inflation indexed, as retirement products for seniors.  Yet, they do not get bought by retirees.  Why?  Well, insurance products are sold, not bought, typically, and when the agent sells an immediate annuity, that is his last sale on that money.  They would rather sell a less suitable product that offers them another sale down the road.  And, people like having flexibility with and control over their investments, even if that leads to less money for them in the long run.  Annuitizing a portion of one’s lump sum lowers risk, and takes the place of investing in bonds in the asset allocation.

Most people like the reliability of their pensions, and Social Security, should it be paid, but do not seek the same thing when investing their private money.  One would think they would invest that money for growth if they had a strong stream of income elsewhere, but often that money is conservatively invested as well.

People get fooled by yield, and in an environment like this, more so.  People try to make their investments do more through targeting higher yields, while ignoring the possibility of capital losses.

Most people can budget, if pressed to do so.  Few can manage a lump sum of capital, and know what to invest it in, and how much to take from it per year.  Few have the discipline to buy an immediate annuity or limit their withdrawals to 4% of assets per year.

But where there is chaos and confusion, some in our government will seek to create a “solution.”  The ill-defined solution that sounds a bit like a Stable Value Fund is what is getting called “R Bonds.”  Here’s the idea: for those with 401(k)  or IRA balances, if they should retire, and not decide what to do with the money, the assets would get automatically get placed into a Retirement Bond, and for two years, the retiree would receive income.  They can opt out before that happens.  If after two years they still don’t decide, the income continues.  There is nothing mandatory about this program, should it come into existence; people who are asleep about their finances may find themselves trapped in it, at least for a time. [Note: there are scandalmongers alleging out-and-out theft being planned by the US Government.  From what I can see that is not true for anyone that keeps his wits about him.  All the proposals allow people to "opt out."]

But let me go further.  Scrap the idea of “R bonds.”  Issue a limited number of Trills for retirees to use, or create a special variant of TIPS that pays until someone dies.  These are easy solutions that do not require a lot of changes to the legal codes, or changes in investment behavior.

Now, there is not just one proposal out there.  Let me give the two most comprehensive:

• Increasing Annuitization in 401(k) Plans with Automatic Trial Income
• Guaranteed Retirement Accounts Toward retirement income security — less desirable.  People should not be coerced into investments for retirement.  People should have a right to choose or not choose.

With interest rates so low on the short end, I don’t see how the returns could be that great from “R Bonds.”   I would play for higher returns given the risk of inflation.  Today that would mean safe stuff that yields little, while waiting for a correction in the fixed income markets, and high quality common stocks with some yield.  And, annuitization at present?  I would wait for higher rates.

Other posts on the topic worthy of your consideration:

• Americans Oppose Proposals to Limit 401(k)s, ICI Says
• Administration explores ‘R bond’ as option for retirement accounts
• Rating the Idea of R Bonds
• Retiree Annuities May Be Promoted by Obama Aides
• Obama Administration Wants to Annuitize 401k’s and IRA’s – Mandatory “R Bonds”

Now, all that said, there is a reason to be politically aware here.  Governments have in the past forced people to convert assets that were more valuable for those that were less valuable.  And, we have the example of Argentina doing it in the present with pension assets, and also when their currency blew up — most debtors faced a forced conversion to less valuable bonds.  With the pension nationalization, it was done in the name of protecting people’s pensions, but ended up benefiting the finances of the Argentine Government.

So, be aware.  R Bonds, as currently proposed, are a bad idea.  But there are worse ideas not yet proposed that might be proposed in the guise of protecting your future.  Let us work to make sure they never get implemented.

1) There is a new blog that I recommend: Macroeconomic Resilience.  I have commented there recently, and I think that he understands the complexity of markets in ways that most Ph. D. economists don’t.  Here is a recent post, and my comment.

http://www.macroresilience.com/2010/01/01/moral-hazard-a-wide-definition/comment-page-1/#comment-6

One job ago, at a hedge fund that was bearish on financials, we would talk about this all the time.  Regulators could have stopped the crisis in the early 2000s had they simply enforced lending standards.  The banks would have screamed and ROEs would have gone into the single digits, but the crisis could have been prevented.

But, regulators are to a degree subject to politicians.  Politicians, in the absence of any moral compass aside from re-election, are mainly beholden to those that fund their campaigns, when the electorate is without education, or a moral compass as well.  Thus, regulations were neutered.

After that, how many businessmen would watch out for the companies they served, instead of what would maximize their pay?  There were some bankers that did so and got shown the door.  There were other banks owned privately, were conservative, and missed the crisis.  It could be done, but the management team or owners had to deliberately sacrifice the short run in favor of missing an uncertain crisis.

Chuck Prince said something to the effect of “When the music is playing, you gotta get up and dance.” to justify doing business in the face of bad credit metrics.  Well, yes, in a place where no one cares for the long-run health of the firms, or of society as a whole.

Someone has to care for the long run.  Better it be free individuals rather than the government.  But if free individuals will not do it, eventually the government will.

2) I have been a fan of Michael Pettis for many years, from his publication of his book, The Volatility Machine.  Here is a comment that I posted at his blog, which I highly recommend:

http://mpettis.com/2010/01/china-new-year-and-one-more-vote-for-gdp-adjusted-bonds/

Michael, I ordinarily agree with you on almost everything economic, but I can’t agree on the trills. I believe in asset-liability matching, even at the government level. Try to match term risk and liquidity risk to what is being funded.

I have argued that the debt structure of the US government has been getting too short, and recommended that the US Treasury lengthen its funding policies — I even said that to the Treasury officials that I met with in November.

http://alephblog.com/2008/11/25/issuing-debt-for-as-long-as-our-republic-will-last/
http://alephblog.com/2009/11/04/my-visit-to-the-us-treasury-part-2/ (2 of 7)

But trills have exceedingly long duration — the remind me of some structured settlements that I have had to model, but these are perpetuities — even longer for the coupon to grow. Duration looks like it would be north of 40 — it depends on the assumptions used.

A perpetuity growing at GDP rates saddles our posterity with debts that they cannot bear. Cheap debt up front — really costly on the back end.

http://alephblog.com/2009/12/27/not-so-cheap-trills/

But, thanks ever so much for your blogging. I learn so much from you. Keep it up.

3)  Insurance for those dropping out of school?  Sounds really dumb:

http://blogs.wsj.com/economics/2009/12/31/would-insurance-for-college-failure-keep-more-students-enrolled/

This sounds like a product that only dumb insurers would write. Never write insurance where the insured has better knowledge and more control than the insurance company.

4) Many are crying over auction rate preferred securities.  But most of the assets that were harmed were owned by corporations, who had investment professionals that chose auction rate preferred securities because they yielded significantly more than money market funds, but with seemingly little risk, and the system worked for around 20 years.

They took above average risks, and now they expect to be bailed out?  I have read through many ARPS prospectuses.  For those that read them, the risks were clearly disclosed.  I do not have a lot of sympathy for those that did not do their job.

5) From the “bitter taste” zone, we learn that foreign investors in US debt lost the most versus investing in the debt of other developed nations in 2009.  Should that surprise us when demands for loans accelerated dramatically in 2009?  I don’t think so, and most reasonable analysts would agree.

As I roll through the day, i often make comments on the blogs and websites of others.  I suppose I could gang them up, and post them here only.  I don’t do that.  Other sites deserve good comments.  Today, though, I reprint them here, with a little more commentary.

1) First, I want to thank a commenter at my own blog, Ryan, who brought this article to my attention.  I’ve written about all of the issues he has, but he has integrated them better.  It is a long read at 74 pages, but in my opinion, if you have 90 minutes to burn, worth it.  I will be commenting on the ideas of this article in the future.

2) My commentary on Dr. Shiller’s idea on Trills drew positive attention, but the best part was being quoted at The Economist’s blog.

3) Tom Petruno at the LA Times Money & Company blog is underappreciated.  He writes well.  But when he wrote Fannie and Freddie shares soar, but for no good reason.  I wrote the following:

7) Then we have Evan Newmark, who is a real piece of work, and I mean that mostly positively.  His article:  My comment:

I never thought the deal where Sam Zell bought Tribune was fair, because it relied on the savings of workers in their ESOP [employee stock ownership plan].  Here is what I wrote in the past:

• Your Money or Your Job! (Or Both!)
• Tribunes are to Promote Justice among Common Men
• Tribunes are to Promote Justice among Common Men, Redux

Well, now Mr. Zell is getting sued by Tribune employees, and he deserves it.  Zell could not have bought out Tribune without the support of the ESOP, but his actions harmed the economic interests of the ESOP, and thus the employees.  Many will agree to anything if their job is threatened.  The semi-coercion plus failure will not work out well for Mr. Zell.

-=-==–==–==–==-=–=-==-=-=-=-=–=-=-=

And, speaking of not working out well, we have the NYT Op-ed on AIG.  I say good, let AIG, the Fed and the Treasury disclose what they said during the bailout.  We already know that many areas of AIG would have gone under without the bailout.  Though the Treasury Secretary has changed his tune on why AIG was bailed out, originally it was only and ostensibly for AIGFP, the derivatives subsidiary.

Let AIG and the Government reveal what they said  regarding the bailout.  The American people deserve to know it.

In the Fall of 2005, I was at the Annual Meeting of the Casualty Actuarial Society in exotic Baltimore, Maryland.  The Keynote address was by Roger Lowenstein who did a talk on two topics.  Warren Buffett the great investor, and the looming problems from the demographic crisis.

At the end of what was arguably a good talk, he asked for questions.  No one raised their hands.  After a pause, he asked for questions again, and I raised my hand.  I commented that he should have given his talk to the Life actuaries — they are the ones concerned about longevity and health costs, and if he really wanted to do a favor for casualty actuaries, don’t talk about Buffett the investor — talk about Buffett the P&C insurance CEO.

He commented that he was asked to speak about the topic by the CAS.  I like Lowenstein, so if you are reading this Roger, my apologies for making the comment.

Warren Buffett on Business is one step closer to the book I would like to see — I would like to see a book on Buffett as an insurance CEO.  Buffett is a great insurance CEO, and deserves a lot of credit in that capacity.  (Warren, I doubt you are reading this, but if you would like me to write that book, please e-mail me.)

But Berkshire Hathaway is an insurance/industrial hybrid, unique among companies.  Warren Buffett on Business ignores Buffett the investor to take up issues that are just as significant: Buffett the business owner and manager.

The words in the book are Buffett’s.  The man who organized the book took Buffett’s words over the last 25-30 years, and organized them into categories regarding management issues.  The topics include:

• Berky acts like a partnership even though it is a corporation.
• Corporate Culture and Governance
• Competent Managers and Honest Communication
• GEICO and Gen Re acquisitions (personally I think Buffett got hosed moving to terminate financial contracts  at Gen Re rapidly.  There is a rule of thumb that says negotiations on illiquid contracts should be undertaken slowly, unless the other side is panicking.)
• Assessing and Managing Risk
• Compensating Management
• Time Management
• Crisis Management
• Acquisitions — Buffett gets to own a wide number of unique corporations, because the one selling out wants the culture preserved, and if the price is right Buffett will do that.
• Ethics in Business
• And more…

Both in the chapters and in the appendices, the words of Buffett shine forth as a way to manage corporations for the best long term results, even if things don’t work so well in the short run.

Quibbles

Much as I like the words of Buffett, I prefer a second voice adding analysis.  Let the words of Buffett star, but let someone else add color and history, because Buffett’s own words are not complete enough.

Also, an analysis of how Buffett managed the insurance lines of his enterprise would be welcome.  Even for those looking exclusively at investment issues, the insurance enterprises offered Buffett the balance sheet he needed to buy assets that could take a while to work out.

Who would benefit from this book: Any manager of any company would benefit from this book.  Buffett lovers, if you have read the last 25-30 years of annual reports from Buffett, and notable things he has said outside of that, you likely do not need this, unless you have specific questions on management that you want answered by Buffett, and you can’t remember what he said in the past.

For most of the rest of us, this will still be a valuable book.  If you want to buy this book, you can buy it here: Warren Buffett on Business: Principles from the Sage of Omaha

Full Disclosure:  I review books because I love reading books, and want to introduce others to the good books that I read, and steer them away from bad or marginal books.  Those that want to support me can enter Amazon through my site and buy stuff there.  Don’t buy what you don’t need for my sake.  I am doing fine.  But if you have a need, and Amazon meets that need, your costs are not increased if you enter Amazon through my site, and I get a commission.  Win-win.