This is a book that gets everything right in broad, but is too insistent on the details.  How should you approach value investing from a purely quantitative standpoint?  Easy:

• Screen out stocks that have relatively high accruals
• Avoid companies that may go bankrupt
• Margin of safety: choose companies with strong balance sheets and profits
• Look for long-term strength in profits.
• Buy them cheap.
• Buy when informed investors are buying.

But here’s the problem.  Like the book What Works on Wall Street, Quantitative Value suffers from over-optimization.  You pass through the data too many times, and you show great returns from the past, should someone have done it that way.  But how much of the result is signal, and how much is an accident?

The broad principles are unavoidably true.  Even the measure of quality, Gross Profits as a fraction of Assets, was new to me, but when I read it, I realized that it was a proxy for having a moat, a sustainable competitive advantage.  I added it to my screening framework.

With all of that said, I have simple advice to the readers.  Follow the broad outlines of what the book teaches, but don’t follow it in detail.  It is good to own companies that are sound, cheap, and improving.

I would also add this: use quantitative screening and scoring as a first step.  I often note that companies that score well in my screens have accounting issues.  So, be wary, and realize that value investing primarily means having a margin of safety. I.e., you won’t lose much if you are wrong.  Purely quantitative value investing can be improved through company and industry knowledge.

Quibbles

Already expressed.

Who would benefit from this book: Amateur value investors will benefit from this book; if the reader does not want to put the effort into learning value investing, this book will be of no use to him.  If you want to, you can buy it here: Quantitative Value, + Web Site: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors.

Full disclosure: The publisher sent me a copy of the book for free.

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.

Data Privacy

• Many in Media Claim Bradley Manning’s Leaks Had Little Value—Here’s Why They’re So Wrong | The Nation stks.co/jZXy Who knew? $$
• Congress grills intelligence officials on data-gathering practices stks.co/qGqB Issue doesn’t divide neatly by political party $$
• Noonan: Privacy Isn’t All We’re Losing stks.co/hZsF “…you can’t give up your own liberty and your own freedom.” $$
• US Agencies Said to Swap Data With Thousands of Firms stks.co/gZcv Not paranoid? That doesn’t mean they aren’t coming 2get u $$
• How Rand Paul Can Take On the NSA stks.co/pGjI We need to rethink the conditions under which the govt may do surveillance on us $$
• Pardon Edward Snowden wh.gov/liZnR I support this petition at whitehouse.gov $$
• US Relies on Spies for Hire to Sift Deluge of Intelligence stks.co/aXgm I have many friends involved in this; they keep quiet $$
• Booz Allen Grew Rich on Government Contracts stks.co/qGMz Thus all the radio advertisements you hear if you live near DC $$
• Edward Snowden: the whistleblower behind the NSA surveillance revelations stks.co/pGCi Rare person who put US ahead of self $$

Rest of the World

• Korean Tiger Moms Scrimp for Tutors in Blow to Spending stks.co/bY3b The solution is home schooling, should it b legal in SK $$
• Italian showdown with Germany over euro looms closer stks.co/bXwF A halt2fiscal & monetary contraction, or full-blown reflation $$
• Southern Europeans Flee to Germany: OECD stks.co/tGdg If the jobs won’t come to the people, the people will go to the jobs $$
• On Iran’s Inflation Bogey stks.co/gZQP Iran’s inflation rate may be over 100%/year $$
• What Abenomics tells us about the great bond market asset bubble stks.co/jZFc Japan is a bug in search of a windshield $$
• Consumer Price Inflation Slows in China stks.co/gYzR & so does the rest of China’s economy, rebalancing will b painful $$
• Denmark Seeks to Pass Too-Big-to-Fail Bank Laws in Parts stks.co/jYj7 SIx large financial companies will require more capital $$

Companies & Industries

• Surge in US oil-by-rail suffers first slowdown as spreads slim stks.co/qGqK Start of a new trend, or just a blip? $$ #blip #trend
• Lampert Uses $393M in AutoNation for Redemptions stks.co/gZcw Future historians will wonder why Lampert received attention $$
• Comcast Is Turning Homes Into Public Wi-Fi Hotspots stks.co/sGaQ Gateway transmits 2signals; separate SSIDs 1 public, 1 private $$
• Berkshire to Provide More Insurance Cost Details stks.co/bXuO All of this data is already freely available, ask4statutory files $$
• Cisco plans to double the speed of the Internet stks.co/iZXI | FD:+ $CSCO Fascinating new technology will increase net capacity $$
• Freeport Declares Force Majeure on Grasberg Copper Shipments stks.co/gZTc Rare 2c Force Majeure invoked; reveals supply issues $$
• Insurers Inflating Books, New York Regulator Says stks.co/iZTl My response: stks.co/fZQE How do I contact DealBook? $$
• Insurers Inflating Books, New York Regulator Says stks.co/sGPY Life insurers do this 2 strip out extra conservatism in reserves $$
• A Rising Star Emerges at Berkshire stks.co/pGYd Bright lady Tract Britt takes over David Sokol’s old role @ Berky $$ FD: + $BRK.B
• Anglo American Miner Slogs Ahead in Brazil stks.co/rG6r Rare people walk away from bad sunk costs; no walking away here $$ $AAUKY
• Google to buy Waze for $1.3B stks.co/aXV7 Improves $GOOG ‘s maps capability, while denying the same asset to $AAPL & $FB $$

Market Impact

• Price Benchmarks Said to Be Rigged in the Foreign Exchange Market stks.co/sGjl Should not b surprised; humans try2rig markets $$
• Regulators Question Banks on Business Lending Risks stks.co/fZV2 Perhaps regulators r being more active this credit cycle $$
• US Banks Margin Under Tremendous Pressure stks.co/rGeA Few safe places to lend at any significant spread over funding costs $$
• Banks Get Reprieve on New Swaps Rule stks.co/jZPA Get 2 more years 2 place derivatives in special subsidiary 4 close regulation $$
• The trick to bank profits stks.co/tGZB Sadly, reserves r not forward-looking but suffer from driving via the rearview mirror $$
• Wrong: Interest Rates are Headed Higher. Are You Ready? stks.co/eXy4 This is a consensus view; global economy is weakening $$
• Earnings Roundup: Second-quarter Earnings Guidance Among the Most Negative on Record stks.co/jZFb Could mean positive surprises $$
• Fear of Missing Out Sparks Covenant Light Lending; ‘Return of the Silly Season’ stks.co/pGYc Credit cycle boom is getting late $$
• These CDO Names Don’t Cry ‘Wolf’ stks.co/hZCu Doesn’t matter *what* you call them, CDOs lever up credit risk til next bear mkt $$
• Intelligent Investor: What’s Eating Munis? stks.co/iYsP @jasonzweigwsj tells us 2 beware getting gouged on muni bond trading $$
• Hulbert on Investing: Why ‘Boring’ Stocks Beat ‘Exciting’ Ones stks.co/dXCa Long-term, low vol has been a winner. Short-term?? $$

Monetary Policy

• Fed Likely to Push Back on Market Expectations of Rate Increase stks.co/tGmK Gives the Fed 2much credit; they don’t have a clue $$
• The Fed’s other trillion dollar problem stks.co/pGjZ Will b challenging 2 lower the amount of excess deposits @ the Fed $$
• The Trapdoors at the Fed’s Exit by Nouriel Roubini stks.co/cXNh Will b difficult 4 Fed 2 remove policy accommodation $$

US Politics & Policy

• White House Aims to Loosen Grip on Government-Held Wireless Spectrum stks.co/hZsO As it should b, govt has 2much spectrum $$
• Camp Warns Against Cap on Charitable Break in Tax Rewrite stks.co/cXsG Private charity can do things govt can’t &more effective $$
• FCC hopes to avoid ‘end of world’ for cell phones stks.co/cXrm Allocation of more bandwidth 2 mobile data would help $$
• Urgency on debt issue fades, but underlying danger remains stks.co/qGAq W/deficit declining, the need to agree declines as well $$

Other

• Larry Ellison’s Fantasy Island stks.co/iZhG Lanai benefits from the benevolent dictatorship of Larry Ellison $$
• Blimps Morph Into Cargo Haulers as Maker Sees Revolution stks.co/fZdT Engineered concept of variable buoyancy; goes up/down $$
• Hire Economics: Why Applying to Jobs Is a Waste of Time stks.co/aXwB Networking is more important than job boards, etc. $$
• Drinking Water Runs Low as Drought Drags On stks.co/gYoc Weather isn’t fully random; correlated in short-run, thus droughts $$

Comments, Replies & Retweets

• @dpinsen Pipelines – high fixed, low variable costs. Railcars – high variable, low fixed costs. Getting pipelines over mountains is tough
• @Undertherock3 I’m a skeptic on $GNW. I don’t trust their reserving, underwriting, etc. Low ROE justifies the low P/B.
• @Undertherock3 Are you talking about Genworth? $GNW
• @AlephBlog The best is “there is no way to get rich quick (eg Kyosaki). Snake oil salesman will always exist, learn to identify them & avoid
• “This deal will get done after it is sweetened a little” — Merkel disq.us/8die83 $$ $DOLE DeJa Vu: Murdock Wants to Go Private Again

Several months ago, I was walking in my bedroom, and in a stack of books that we frequently give as gifts, I saw the book Value Investing: From Graham to Buffett and Beyond.  I said to myself, where did this come from?  I looked at it, and realized that hadn’t read it.  I looked at the copyright date, and realized that 2001 is a relatively old book.

So I read the first chapter, decided it was good stuff, and added it to the reading pile.  As some might know, I am a value investor, and recently I wrote an article called “Value Investing Flavors.”  In it, I took a broad view of value investing, because there are many common principles to value investing employed by all, but many variations on implementation. [Note to those reading at Amazon; they don’t me post links, but if you Google “Aleph From Graham to Buffett and Beyond” you will find it.]

The book begins with unified principles of value investing: margin of safety, buy ing an asset cheap, etc., but moves on to different ways to implement value investing, depending on the types of companiesthe investor wants to analyze.

There are three ways to do the analysis for value investing:

• Re-estimate the fair value of the assets and liabilities on the balance sheet.  This applies best to companies where converting resources to a better use would be compelling.
• Estimate the normalized earnings power of a slow growing company.
• For a company with a moat, a sustainable competitive advantage, conservatively estimate the path of growing earnings.

I listed the three of them in the order of increasing aggressiveness of analysis, and the amount of work that would need to be done to be assured that there is an opportunity.

After this, the book writes about eight notable value investors, who come from the various camps inside value investing, and puts more flesh on the bones as to the implementation of each method.  I immediately recognized the names of 6 of the 8 value investors.

But what I found most useful were the insights of the investors that would buy small companies.  You can buy ugly situations that are misunderstood, and wait for management to turn the ship around.

This book was a good balance between theory and practice.  I enjoyed this book.  I think most amateurs wanting to learn about value investing would benefit from it.

Quibbles

None.

Who would benefit from this book: Amateur value investors will benefit from this book; if the reader does not want to put the effort into learning value investing, this book will be of no use to him.  If you want to, you can buy it here: Value Investing: From Graham to Buffett and Beyond (Wiley Finance).

Full disclosure: I have no idea where I got this book.

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.

Sometimes, when I see an insurance article that could be big, relevant, and tough to explain, I say to myself, “Dave, you’re going to have to write about that.”  But now, I get requests via email to write about it.

So tonight I write about the New York Department of Insurance’s attempt to rein in captive insurers.  [Long report here.]  My first question to the department would be: “What took you so long?  These issues have been known for years.”

I write this as one that in general admires the New York Department of Insurance.  They are the toughest regulator of insurance in the US.  If I could have my way, I would replace the Federal Insurance Office (“FIO”) with the New York Department of Insurance, and let New York regulate the country.  But that can’t happen.  Insurance is regulated by the states.  As a result, if some states are liberal with respect to reserving practices, companies can set up reinsurers there, and shed reserves to a state that allow the reserves to be lower.

Now, why does this happen with respect to life insurance, and not other insurance?  There are complexities in the regulatory ["statutory"] reserving where the statutory reserving does its estimates such that every advantage a policyholder has versus an insurer gets used against the insurer.  That makes the reserve high.  But on average, policyholders aren’t that smart; the reserves should be lower.  Should they be as low as the GAAP reserve, which is supposed to be conservative and realistic?  That seems to be the goal of many insurers.

Life insurance is long in duration, which means small differences in assumptions can make relatively large differences in the reserves.  That’s why you only see it in life insurance.  This happens with long-dated term insurance, universal life, and any product that guarantees that are not core to the product, and are hard to calculate reserves as a result.

But what about mutual versus stock companies?  First, let’s take a step back.  Why does statutory accounting matter?  It matters because it affects the ability of regulated insurance companies to dividend money to their holding companies.  The lower statutory reserves are, and the lower risk-based capital requirements are, the more that can be dividended, and the greater the flexibility of the enterprise.

Mutual life companies typically have more capital than they need, and they do not have a claimant on the excess (unless it is management, and that is quiet, slow, through the pension plan, the hidden plans, etc. Shh.)

Stock Life companies have to optimize their capital to compete against everyone else.  Sorry, but that is the way it is.  Let’s move to the recommendations of the NY Insurance Department:

Given the troubling findings uncovered during its investigation, DFS [Department of Financial Services] is taking immediate action and making several recommendations to address the potential risks and lack of transparency surrounding shadow insurance:

1. Through its authority under New York Insurance Law, DFS will require detailed disclosure of shadow insurance transactions by New York-based insurers and their affiliates.

2. In the interest of national uniformity, the National Association of Insurance Commissioners (“NAIC”) should develop enhanced disclosure requirements for shadow insurance across the country.

3. The Federal Insurance Office (“FIO”), Office of Financial Research (“OFR”), the NAIC, and other state insurance commissioners should conduct similar investigations to document a more complete picture of the full extent of shadow insurance written nationwide.

4. State insurance commissioners should consider an immediate national moratorium on approving additional shadow insurance transactions until those investigations are complete and a fuller picture emerges.

Number 1 is a given.  New York can do that on its own.  New York could unilaterally refuse to give reserve credit to any reinsurance agreement they think is not creditworthy.  But that comes with a cost: native New York insurers might leave, and leave behind a small New York only “pup” insurer.  (Imagine Metlife decamping to New Jersey, and AXA’s American subsidiary also.)  That’s what most insurers do, because New York is a tough state for insurance.  If the size of the New York insurance industry shrinks, so will the New York Insurance Department.

Number 2 is not a given.  There are a number of states that benefit from looser regulation.  The NAIC only advises & proposes; it does not create law.

Number 3 could be done, but will they do it?  There are many other issues that press.  The states that benefit from captive insurers will not want to cooperate.

And for the same reasons as 2 & 3, 4 will not likely succeed.  Not everyone has the same incentives here.  New York is engaging in bluster.

What Would I Do?

1. I would take the risk, and disallow reserve credits from companies in locales that don’t regulate insurance well.
2. I would disallow the use of surplus notes for stock companies.  With stock companies, it is just a hidden form of leverage.
3. I would eliminate all surplus relief from reinsurance treaties that do not rely on “diversifiable risks.”  If it is merely shifting a nondiversifiable risk, offer no reserve credit.  The company should bear that itself.

Insurance CEOs can be glad I am not their regulator; they would have a tough time under me.  There is nothing that they know that I don’t.  That said, the New York Department of Insurance will have a a hard time making their ideas work, unless all the states agree with them, and that is not likely.

Okay, here’s the promoted stock scoreboard:

Dephasium has fallen almost 82% in 6 days.  It is a definite over-achiever in losing money.

I promise this is not going to become an “all promoted stocks, all the time” blog.  I limit it to when I receive promotions.  I got another one today, this time to my e-mail.  The future loser is Norstra [NORX].  You can see a promotion like the one I saw here.

Here are the bullet points:

• Never had a penny of revenue.
• Consistent losses every year.
• Only stays afloat by selling stock.
• Auditors don’t think they are a going concern.
• If management has been selling shares to get cash at $0.001, why is the stock trading near $1?

It is highly likely that this company will do badly, as have other promoted stocks that I have written about.  But here’s the fun part — I wrote to the guy whose organization sent out the promotional e-mail.  He didn’t know that they were doing that; he was concerned for the reputation of his organization, and he is putting a halt to advertising stock promotions.

And so, Aleph Blog happily takes a small victory lap.  Promoted stocks are bad enough, but when reputable firms aid them, it is far worse.

I’m not going to run the promoted stock scoreboard again so soon, but let it be known that Dephasium has fallen ~75% in the 5 days since I wrote about it.  Put on your peril-sensitive sunglasses, here is the chart:

Yes, my article was written at the peak.  In this case the “dump” was rather violent.

But why I am I writing about promoted stocks this evening?  This morning in my e-mail, I received this [note: after a little time, this link won't work].

But who sent it to me?  The Washington Times.  After receiving it, I sent someone in their web area this letter:

YYY,

I don’t know if you handle this aspect of Washington Times advertising, but today I received a promoted stock ad for a fraudulent company from the Washington Times via e-mail.

The company’s name is Polar Petroleum [OTCBB: POLR], a company which:

• Has never earned a penny of revenue.
• Was a “technology company” until last year, “Post Data.” From its last 10K: “The Company intends to market a service of decommissioning electronic data storage devices, making them inoperable and thereby making the electronic data contained therein or on permanently un-recoverable.“
• Is likely being used by the promoters to do a “pump and dump,” where affiliates do a series of transactions that inflate the price of the thinly traded stock, and use this promotion to dupe people into buying out their shares at inflated prices, leaving them holding stock of a worthless company.  The net worth of the company is $0.005/share – It trades near $5 thanks to the pump.

It’s dishonest for the Washington Times to participate in crud like this.  Why is the Times selling its reputation for a bunch of promoted stock scammers?

Sincerely,

David

PS – I have written about this extensively.  Here is a sample:

http://alephblog.com/2013/06/03/another-lousy-promoted-stock/

To have a reputable newspaper convey the garbage that the promoters put forth is new, and worrisome.

But about the same time that I hit the “Send” button, the SEC took action.  They suspended trading in POLR.  They justified it here.  Good work, SEC!  (Can’t remember the last time I said that.)  And if you want to see the reactions of those that follow promoted stocks regarding POLR, you can see it here.

Though the loser promoting this garbage said it would go to $27, I’ll give you a different prediction: it will go to less than fifty cents within a year.  Given the actions of the SEC, it could easily go there on June 24th, when trading reopens.

Here is my advice to the SEC: maybe you could create a unit that follows promoted stock fraud, and do exactly what you have done with POLR to every promoted stock scam.  It would eliminate a significant area of fraud in our equity markets.

Market Impact

• Old-School Stock Picker Weitz Struggles With Index Craze stks.co/gYnx Weitz has a really good long term track record, good guy $$
• High-Yield Companies Cash In on Dividend Deals stks.co/cXCJ W/the rise in interest rates, junk corporations move 2 refinance $$
• IRS Reconsiders What Qualifies for REIT Status stks.co/jYiU There should b1 tax law for all things like corporations in the US $$
• New Revenue Recognition Rules Arriving Soon stks.co/rFvA I’m afraid the new rules will b less clear than current GAAP rules $$
• How the Robots Lost: High-Frequency Trading’s Rise & Fall stks.co/gYk9 Every investment strategy has a capacity limit, even HFT $$
• Sam Zell says sell stks.co/rFr3 1 month old; he also thinks that efforts by corporations 2 manage single family homes will fail $$
• Banks will take hit on mortgage refi buststks.co/pFwq This may true 4 whole industry, but some banks will profit via MSRs, ALM $$
• FASB’s Seidman: Americans Prefer Rules to Principles stks.co/pFpb We should stick w/GAAP & ditch IFRS convergence. We know GAAP $$
• IFRS Makes Progress Around the Worldstks.co/tFir Incomparable Financial Reporting Standards r less converged than many realize $$
• 401(k)s Are Doing Great Except For A Few stks.co/eX9U Fine,except 401(k) users don’t put enough away 2 care 4 their retirements $$
• Why Low Volatility Is Losing Its Alphastks.co/cX0J Any strategy can be overfished. Monoculture rarely leads to good results $$
• “Any strategy can be overfished. Monoculture is a recipe for disaster. How many analogies do I…” — David_Merkeldisq.us/8dev71 $$
• Money-market fix is a flawed compromise stks.co/dWtx My proposal was cleaner and far better: stks.co/dWty$$
• Bet on CDOs Returns to Wall Streetstks.co/bWy4 Synthetic CDOs take the field again, just in time to fleece anxious yield hogs $$
• Bruce Berkowitz Places Bet on Fannie, Freddie stks.co/jYCL A lot of this rides on political future of F&F, w/Berkowitz unsure $$
• Don’t Sell Your Soul for Yield, Pimco’s Simon Says stks.co/qFRi He retires @ 52 2pursue philanthrophy & fun; bond risks high $$
• Rise in US Bond Yields Jolts High-Dividend Stocks stks.co/qFIa If they r used as bond substitutes, will trade more like bonds $$
• Brokerage firms debate value of Certified Financial Planner title stks.co/dWU1Interesting 2c firms asking CFPs to decertify $$
• The 100% Stock Solution stks.co/sEyrOnly the stoutest souls should try this; best time to start is after a meltdown, if u can $$
• The Intelligent Investor: How Funky Is Your 401(k)? by @jasonzweigwsjstks.co/dWKf Unusual bond funds not recommended 4 novices $$
• Why Hedge Funds Aren’t Worth the Money stks.co/iXxM Double-alpha & leverage r great in theory; in practice they don’t work well $$
• ‘ @Matthew_C_Klein @felixsalmon But I disagree: blogs.reuters.com/felix-salmon/2… Cov-lite loans r a sign of general credit degradation $$
• Interesting argument by @felixsalmonthat cov-lite bonds are good because they give borrowers greater flexibility:blogs.reuters.com/felix-salmon/2…

US Politics

• The NSA Doppelganger stks.co/jYiY Govt has been collecting records on every phone call made in the US ever since Patriot Act $$
• Will New Health Insurance Be Too Expensive 4 America’s Lowest-Paid?stks.co/rFvF Law of unintended consequences teaches $$ lessons
• Trading Dollar Bill for Coin Big Savings, No Small Change stks.co/iYrY This could makes sense if we eliminate the penny as well $$
• Fed Hurdle of 4 Straight 200,000 Payrolls Sets Bernanke View stks.co/iYrW I don’t think the Fed has a coherent policy response $$
• An Insider’s Guide to Obama’s Summit With China’s Xi stks.co/sFp7 Makes me think that nothing much will come out of this summit $$
• Start Your Engines: NatGas Revs for Transportation stks.co/hYwm This is more complex than it looks b/c liquification low temps $$
• Obama’s Civil-Liberties Record Questioned stks.co/qFu9 Obama is not a change agent; he is merely Bush-plus & we r the losers $$
• US declassifies phone program details after uproar stks.co/hYwd Terrorism is an unlikely threat – doesn’t justify the snooping $$
• Alan Greenspan’s Epic Incompetence: Another Shoe Drops stks.co/jYXF This piece provided the link 4 the last tweet $$#greenspan
• How Elite Economic Hucksters Drive America’s Biggest Fraud Epidemicsstks.co/eXA3 Of course fraud should b a crime, it’s theft $$
• NSA seizes phone records of Verizon customers stks.co/jYXC Shouldn’t a warrant b required 4 such indiscriminate investigation? $$
• Jefferson County, AL, Reaches Bankruptcy Deal stks.co/gYbR $JPMloses most, then taxpayers. “gross incompetence, waste, graft” $$
• Debt Deal in Alabama Will Cost JPMorgan stks.co/aX7U Sewer rates rise. Everyone loses except the speculators who bot debt cheap $$
• Warplanes to Tankers Delayed by Contested US Contracts stks.co/gYUYLosers contesting contracts is now normal & slows things $$
• FHA Losses Could Hit $115 Billion in Extreme Scenario stks.co/gYLJ 4 political reasons, FHA guaranteed lousy loans, losses come $$
• Jefferson County Paves Way for Bankruptcy Exit stks.co/cWky The biggest losers r taxpayers, but then they elected the schmoes $$
• Mistake: $AIG, $PRU, $GE Named Systemically Important by Panelstks.co/jYCN Focus should b: financing long assets w/short loans $$
• The Real Scandal at the IRS stks.co/sFMf“…larger threat of abusive behavior by a fearsomely powerful government agency.” $$
• ObamaCare Bait and Switchstks.co/jYCG Obamacare was never meant 2 make healthcare affordable 2all, only 2 those w/o insurance $$
• It really annoys me, because the key of financial safety is asset/liability mgmt & all of new regulations do not tighten this up $$
• Risk that the Feds should care about is the toxic mix of illiquid assets funded by liquid liabilities; long liability structures r safe $$
• Feds close to picking ‘risky’ non-banksstks.co/iY88 Really looks like the Feds r going2goof again & call non-risky firms risky $$
• Overstated: Risk-Averse Culture Infects US Workers, Entrepreneursstks.co/eWev Generally moderate risk-taking leads2best result $$
• Little Cause for Inflation Worriesstks.co/jXms Far better 2 use median or trimmed mean CPI, than the more doctored core PCE $$

Europe

• France demands emergency EU summit over China’s wine tax threat stks.co/dX8ATrade wars have 2 start somewhere, however small $$
• Moody’s Casts Doubt Over Nordic Havens Amid Housing Risksstks.co/bXCh Rest of world adopts bad monetary policy of US, EZ&Japan $$
• Central Banks Put More Scandinavian Currencies in Reserve stks.co/jY4tEnables the Nordic countries to import asset inflation $$
• Swiss Seen Passing US Bank-Tax Law to Avoid Worse Fate stks.co/qFJY Most compromises r better than seeing many banks die $$

Companies & Industries

• Tyson CEO Says Smithfield Deal Could Aid Pork Exports stks.co/iYnc Many Chinese might like 2 buy high quality American food $$
• $COST CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World stks.co/gYk1 Investing in workers vs cheap workers $$
• Wells Fargo Will Benefit From Interest-Rate Increase, Sloan Says stks.co/eX42Could just b brave words, few give up income $$
• Fannie Shares Seen as Worthless Surging in Disconnect stks.co/dWtw The politics of the situation r in flux; no margin of safety $$
• Goldman Wants You to Forget About Too Big to Fail stks.co/gYUx There is a subsidy to the big banks, not as large as some think $$
• Like Berkshire, Markel thrives on buy&hold stks.co/rFbN Thomas Gayner, like Buffett is a compounder w/underwriting float $$ $MKL
• Alcoa Junk Downgrade Is Rare Trauma for Dow Stocks stks.co/iYYW Time2 modernize & create News Corp Indexstks.co/gYUZ $$
• Whale of a Trade Revealed at Biggest US Bank With Best Control stks.co/iYYVLong but definitive article on $JPM credit trade $$
• Scor to Buy Generali Reinsurance Unit for $750 Million stks.co/tFMQ How do u say “Scottish Re” in French? “Scor” $RGA$$ #spitspit
• Apple Saves $724 Million With Well-Timed Sale stks.co/qFCo 20-20 hindsight, but $AAPL timed their debt sale well $$
• Kinder Morgan Cancels $2 Billion Pipeline Plan stks.co/iY7O Sending crude via rail costs same & does not require LT contract $$

Asia

• Hedge Funds in Japan Ride Small-Cap Rally on Abenomics Boost stks.co/eX41Be wary here, because there is no clear macro path $$
• The Wonk With the Ear of Chinese President Xi Jinping stks.co/qFfh A modernizer who wants the Communist Party 2 keep control $$
• Topix Profits Percentage Increase Tripling World Even in $400 Billion Wipeout stks.co/qFUz Wait. Weak yen also has bad effects $$
• Poultry-Plant Fire in China Kills Dozensstks.co/jXzF Sad, but it is common 4 firms that hire low wage workers 2 cut corners $$
• Muddy Waters to Jupiter Seek Profit as Risk Rises stks.co/eWeV Convoluted financial systems can’t handle as much debt b4 crisis $$
• Heard on the Street: Let Me Not See Old Age in China stks.co/qFCr Elderly poor who live away from the coasts suffer in China $$

Other

• Co-hosts of radio show ‘The Pursuit of Happiness’ commit suicide togetherstks.co/sFhK Happiness pursued as its own end fails $$
• Harvard Humanities Fall From Favor Among College Students stks.co/rFgfThere is no one more unrealistic than a humanities prof $$
• To Catch a Thief: Banks Try Using Big Data stks.co/jYPf The banks try 2 detect correlated behavior among fraudsters & succeed $$
• How Retirees Pay Zero Taxesstks.co/eX3v If you r older & have little wage income there r often ways 2 reduce your taxes $$
• Bermuda With Ireland Targets of Tax Vigilantes, Minister Says stks.co/hYTPThey were really surprised when NATO blockaded them $$
• Marriage Advice: Sharing a Hobby Is Good for Your Relationship stks.co/tFMwOur hobby is raising kids, will have2find a new one $$
• Meredith Whitney’s “Great Migration”stks.co/fYHh Disliked by genuine muni experts @catelong &Joe Mysakstks.co/gYGr $$
• Government 2 Hold Back Growth for Years stks.co/qFJ0 Balancing the budget may have far less drag than most suppose, lowers risk $$
• Vatican says Pope Francis got it wrong, atheists do go to hell stks.co/iY8I Adults @ Vatican correct Pope’s wishful thinking $$
• Wrong: Smartest Decision Ever Made by Bill Gates, Warren Buffett stks.co/rFAj If u raise your children right, they can handle $$
• Behind the ‘Internet of Things’ Is Android—and It’s Everywhere stks.co/tF9hAmazing how 1can change the world on lo profit mgns $$

Finance

• Has BIS Found the Solution to Too Big to Fail? stks.co/fYcY Has issues, but much better than what was done in 2008. Worth a try $$
• The rise of the real collateral ‘mining’ business stks.co/bX4T Overproduction of commodities feeds the shadow banking system $$
• What is the opposite of helicopter money? stks.co/eX43 Negative interest rates suck liquidity, as people seek stores of value $$
• World Chasing U.S. Yield With 25% Deal Jump: Real Estate stks.co/hYUF Enough inventory 2 pick from & seems 2b recovering $$
• A World Awash in Credit with Much Work to Do stks.co/gYHW Increasingly hard to find safe yield; EM still seems promising,but… $$
• i’d like to see: zip code level correlation between house price growth from 2011 to 2013 against absentee purchase share during same period.
• Hedge Funds Boost Gold Bull Bets Most in Two Months stks.co/jY4r Makes me a little edgy for gold prices $$
• Mortgage Investors Get Blindsidedstks.co/pFMV Bonds Backed by Subprime Loans Had $1B Previously Undisclosed Losses $$ #surprise
• Emerging-Market FX Gets Ugly. Very Ugly. stks.co/qF1e Yeah, I feel it, just look at the chart in $EDD of which I am long $$

FWIW

• My week on twitter: 51 retweets received, 58 new followers, 34 mentions. Via:20ft.net/p

Let me admit my bias at the start.  Physics is the wrong model for financial markets and economics.  The better models are ecological or biological, because people adapt to conditions that change.  Perhaps we are predictable on average, but there is a wide variation in specific behaviors.

Economics and ecology deal with scarcity and plenty.  Physics does not.  Physics is exact, aside from the quantum and universal scales.  Economics and ecology are never exact, and prediction is fraught with error.

But what of financial instruments where the math of physics might have application?  Perhaps physics has some application there?

Okay, sort of.  Even something as pervasive as option modeling does not truly have a simple model, but implied volatility has to be re-estimated regularly for the Black-Scholes Model.  A true model does not require re-estimation of a parameter, particularly when it varies by time and strike price.

What I liked  about the book

I liked reading about the mathematicians who applied analogies from physics to economics. Even though the models had their flaws, they improved the explanatory power.

I also appreciated how the author kept explanations simple.  He could have gone into a lot more detail, and a lot more math, and he would have lost most of his audience.

He also explained the life circumstances of the men he wrote about.  That adds depth, because science does not occur in a vacuum.  It is a social activity.   Few men think purely abstractly, and those that do ride the edge of genius/insanity.

There are two motives for understanding  how men approach markets — to explain, and to make money.  The book has both sorts, and it is a strength to see one validate another.

Quibbles

Already given

Who would benefit from this book: If you want to learn about men who shaped the market by their knowledge of math, you will like this book.  If you want a book that explains the markets, this is not it.  If you want to, you can buy it here: The Physics of Wall Street: A Brief History of Predicting the Unpredictable.

Full disclosure: I received a free copy from the publisher.

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.

Note to readers: I plan on doing a series of book reviews over the next few weeks.  I may do more than a dozen.  I hope you enjoy them.

I am a value investor.  That’s what I do for a living, and I do it well.  One month ago. I wrote a piece called “Value Investing Flavors.”  In it, I took a broad view of value investing, because there are many common principles to value investing employed by all, but many variations on implementation. [Note to those reading at Amazon; they don’t me post links, but if you Google “Aleph Art of Value Investing” you will find it.

The Art of Value Investing takes a similarly broad view, quoting well over 100 value investors (I lost count) on topics where professional value investors agree & disagree.  The authors have interviewed the grand majority of those cited, and have useful historical quotes from well-known figures familiar with the subject.  Better known and more accomplished value investors tend to get more play in the book — I think the authors chose well.

The book is organized by topic.  It covers these questions:

• The importance of a margin of safety
• Buy high margin quality businesses, or cheap low margin businesses?
• What attention should be paid to growth opportunities? (Controversial)
• What is your circle of competence? (I.e. what opportunities do you rule out because you don’t get how to value them?)
• How small of a company would you consider buying?
• How much do you incorporate top-down macroeconomic considerations?
• What countries would you not consider buying a company within?
• The advantage of being able to buy and hold for years.
• How careful research often conquers uncertainty.
• Do you buy turnarounds or not? (Controversial)
• How do you generate good buy ideas?
• How do you create a firm that ignores the conventional perspective, and generates correct ideas that few know?
• How do you analyze what could go wrong with a company?
• Do you look for catalysts to unlock value or not? (Controversial)
• Do you analyze value through one framework or many?  Cheap going concern or transformation of underused assets? Both?
• Do you manage for absolute value or relative value?  I.e., what is the value of safe assets, or even gold?
• When do you establish an position?  How do you size it?
• How diversified do you want to be?  How do you weight positions?
• How much do you care about stocks being correlated within the portfolio?
• How long are you willing to wait to see if an idea works?  When do you admit that you are wrong?
• Are you willing to advise management?  Are you willing to fight management?  When does it make sense?
• Do you short bad stocks or not?
• When do you sell?  Do you do it never, gradually or rapidly?
• How do you maintain a sound mind and humility amid all of the clamor of the markets?
• How do you admit mistakes, so as to avoid them in the future, and show humility to your clients?

If you want to understand the nuances of how a firm doing value investing works, I can’t think of a better book, because this book implicitly goes over all of the choices that a value investor has to make.  What factors will I focus on, and what will I ignore?  How detailed will my analysis be?  How much will I diversify?  How will I make choices among so many stocks vying for my attention amid all of the news noise?

I have strong views on value investing myself, but I questioned my own ideas as I read the replies of those more successful than me.

Quibbles

Initially, as I read the book, I wondered if a better book could be made by organizing by each firm, rather than topic.  By the end of the book, I realized I was wrong.  Not all firms have opinions on many questions, and doing the book by topic highlights the variation in opinions across a wide spectrum of organizations.

Who would benefit from this book: Amateur and professional value investors will benefit from this book; if the reader does not want to put the effort into learning value investing, this book will be of no use to him.  If you want to, you can buy it here: The Art of Value Investing: How the World’s Best Investors Beat the Market.

Full disclosure: I received a free copy from the publisher.  I personally know a few of the value investors cited.  I would like to meet more of them.

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.

Time for the promoted penny stock scoreboard:

Tonight’s loser-in-waiting is Dephasium Corp [DPHS], which surged to a high of 59 cents today, probably off of the promotion of the stock, and the completion of an acquisition.  Here are my bullet points on why this company will fail:

• No earnings
• No revenues
• Negative tangible book value
• Acquires an asset of dubious value.
• Formerly known as Expertelligence, Inc, Pay Mobile, Inc, & Allied Ventures Holding Corp.  What do you want to be when you grow up?  Sorry, *if* you grow up.
• Auditor doubts the the company will continue its existence.
• Company has consistently lost money through all of its existence.  Has survived through continual dilution of its stock.
• To do the acquisition, they sold stock at six cents a share.  They bought back stock at three cents per share.  Now it trades at nearly 60 cents per share.  That makes no sense at all.

As for the acquisition, let me quote from the article linked above:

Since 2006, Dephasium Ltd. has launched a program of research and development to become the leader in the field of people protection against electromagnetic waves emitted by mobile phones. Dephasium Ltd. has succeeded in developing an Ancilia product that it believes protects up to 98% of electromagnetic waves issued by cell phones. This conclusion is based upon the results of technology tests administered by Cetecom ICT Services and included in its written report dated August 10, 2009.

Let me get this straight: you have a product that can reduce electromagnetic waves from cell phones, and you are willing to sell it for a piddling 70M shares of this crud company?  Why didn’t you do deals with Samsung, Apple, LG?  If the test is four years old, why don’t you have a big business by now?

The promoter paid $2.7M to advertise Dephasium.  When I googled the promoter and the one paying, I came up with nothing.  The amount paid is more than the value of the company acquired.  The whole thing stinks.

So avoid promoted stocks.  Don’t buy what someone is trying to sell you; buy what you have researched and discovered on your own.