Bill Miller and the Existential Crisis of Value Investing

(or what did you in the crash of '08 Daddy?)

The Wall Street Journal Article on Bill Miller highlights a existential problem for value investors. Reading what he said, Miller basically bought stocks into the panic, as he had done before, only this time, by his own admission "The thing I didn't do, from Day One, was properly assess the severity of this liquidity crisis," He had a well worn playbook and it just did not work in this market. Now, if he goes out and beats the market for 8 of the next 10 years then his methods will presumably have proven to be valid. Or are they?

Now, obviously Miller has the institutional imperative that he had to buy and stay in the market. Even as individual and not institutional investors, how can one develop the intellectual and intestinal fortitude to avoid this sort of debacle? Biglari's playbook also looked great before this debacle. (Buy real estate heavy restaurants that can be franchised.)

Now perhaps Mauboussin's article on reproductive strategies in nature points to an answer, but I just don't know. (Some animals have lots of babies--diversification? Some have just a few--focus investing? And some store for the really lean times--Berkshire, Fairfax?)

Is it just temperament, either cultivated or genetically inherited that makes better investors? And those qualities to anticipate the next weird turn are presumably what Buffett is looking for (or found) in his CIO successor.

Anyway, the point remains how the hell do you get to the point that you can at least carry Watsa's shoes(CEO of Fairfax, which made a bundle on the crash)--not to mention Buffett's?

How about that!

What an Historic and Wonderful time in which we live.


I caught President-Elect Obama's first post election news conference. He did not call on a Fox correspondent. Well elections do matter(in many, many ways!)

Best to all

A few afterwords--Palin, Africa and Saks Fifth Ave.

Now that the campaign is over the postmortems are starting. Two of the most interesting revelations are from major news outlets, Fox and Newsweek. It’s nice to see that old media can still do the scooping. (The reality is they do most of the real reporting, but there are not getting paid for it anymore.) Anyway, the Palin revelations are at times amusing and frightening and also speak to what it does and does not mean to be a journalist in 2008.

So the Fox revelations, embargoed because of they were off the record are frightening. Forget Palin’s inability to even make a credible stab at what the Bush doctrine was. (Helpful hint here from John McCain, sung to the Beach Boys, Bomb, Bomb, Bomb, Bomb, Bomb Iran, etc.) She did not know that Africa was a continent (it is!) or who were the countries in Nafta (U.S., Canada, and Mexico) Now here is a question. Forget for a moment that Ms. Palin had a reasonable chance at being president if the Repubs had won, how in the hell did she even get to be governor of a state? My middle school daughter knows that Africa is a continent and my 9th grade son knows what countries are in Nafta.

Now let’s think about Fox and its responsibilities. They knew before the election of Palin’s obvious deficiencies. If they had been told off the record that Obama had a daughter who was 17 and pregnant, would they have waited to tell the world, even though that information would have had no bearing on the President-elect’s ability to govern. Somehow I think not.

I will leave you with some other tidbits from the Newsweek—That the McCain campaign told Palin to get three outfits and get her hair done, she took that as license for a shopping spree; one aide calling it "Wasilla hillbillies looting Neiman Marcus from coast to coast," She spent more than the $150,000 reported and she bought clothes for Todd as well! She wasn’t just nearly a heartbeat away from the presidency she was a checkbook away.

Also Obama apparently was caught on tape musing over the inanities of some of the questions he was asked. One reason, I could never be a politician, I can’t dignify a stupid question with, “Gee, Roger, that’s a good question,” while I’m think that was as dumb as dirt. According to Newsweek.com Obama said "I don't consider this to be a good format for me, which makes me more cautious. I often find myself trapped by the questions and thinking to myself, 'You know, this is a stupid question, but let me … answer it.' So when Brian Williams is asking me about what's a personal thing that you've done [that's green], and I say, you know, 'Well, I planted a bunch of trees.' And he says, 'I'm talking about personal.' What I'm thinking in my head is, 'Well, the truth is, Brian, we can't solve global warming because I f---ing changed light bulbs in my house. It's because of something collective'."

Tainted Halloween Candy

Here is a heads up about some Halloween candy that could be bad for kids: The U.S. Food and Drug Administration (FDA) is warning consumers not to consume White Rabbit Creamy Candy or Koala's March Crème filled Cookies because they may contain melamine. (1) And, the Canadian government is warning the public not to consume Sherwood Brands Pirate's Gold Milk Chocolate Coins, which may also have reached the U.S. (2)

What's wrong with these candies? You've likely heard about the dangerous chemical, melamine, which was recently found in the Chinese milk supply and sickened thousands of children in China. We've now seen reports that melamine tainted milk has been used in some Chinese candy products that have been shipped to the United States. (3)

The good news is that Chinese candy makes up only 0.7% of the candy sold in the U.S. (4). The World Health Organization says that the risk of serious harm from minor exposure to melamine is considered low. BUT there is no known safe amount of melamine for children. The FDA has put the "limit" exclusive of baby formula at 2.5 parts per million, but Chinese made candy has been found to have 500 parts per million. (6)

See the Tainted Candy Pictures, Get the Flyer & Tell Friends Here:
http://www.momsrising.org/melamine

1. http://www.fda.gov/oc/opacom/hottopics/melamine.html

2. Here's the Canadian government's warning:
http://www.inspection.gc.ca/english/corpaffr/recarapp/2008/20081008e.shtml
The Vancouver Globe and Mail:
http://www.theglobeandmail.com/servlet/story/RTGAM.20081028.wlhalloween28/BNStory/lifeFamily/home
And an article in the Chicago Tribune:
http://featuresblogs.chicagotribune.com/features_julieshealthclub/2008/10/chocolate-coins.html

3. From Consumer Reports:
http://www.consumeraffairs.com/news04/2008/10/chinese_formula07.html, and
Candy problem verified on Snopes:
http://www.snopes.com/food/warnings/coins.asp

4. http://www.usatoday.com/news/health/2008-09-24-melamine-china_N.htm

5. "Consumers exposed to tiny amounts of melamine shouldn't worry, says
Angelika Tritscher of the World Health Organization. 'Melamine at low
doses is actually not considered to be very toxic.'" Quote from:
http://www.usatoday.com/news/health/2008-09-24-melamine-china_N.htm

6. http://www.consumeraffairs.com/news04/2008/10/chinese_formula09.html

Tainted Halloween Candy

Here is a heads up about some Halloween candy that could be
bad for kids: The U.S. Food and Drug Administration (FDA) is warning
consumers not to consume White Rabbit Creamy Candy or Koala's March Crème
filled Cookies because they may contain melamine. (1) And, the Canadian
government is warning the public not to consume Sherwood Brands Pirate's
Gold Milk Chocolate Coins, which may also have reached the U.S. (2)

What's wrong with these candies? You've likely heard about the dangerous
chemical, melamine, which was recently found in the Chinese milk supply
and sickened thousands of children in China. We've now seen reports that
melamine tainted milk has been used in some Chinese candy products that
have been shipped to the United States. (3)

The good news is that Chinese candy makes up only 0.7% of the candy sold
in the U.S. (4). The World Health Organization says that the risk of serious harm from minor exposure to
melamine is considered low. BUT there is no known safe amount of melamine for children. The FDA has put the "limit" exclusive of baby formula at 2.5 parts per million, but Chinese made candy has been found to have 500 parts per million. (6)

See the Tainted Candy Pictures, Get the Flyer & Tell Friends Here:
http://www.momsrising.org/melamine

1. http://www.fda.gov/oc/opacom/hottopics/melamine.html

2. Here's the Canadian government's warning:
http://www.inspection.gc.ca/english/corpaffr/recarapp/2008/20081008e.shtml
The Vancouver Globe and Mail:
http://www.theglobeandmail.com/servlet/story/RTGAM.20081028.wlhalloween28/BNStory/lifeFamily/home
And an article in the Chicago Tribune:
http://featuresblogs.chicagotribune.com/features_julieshealthclub/2008/10/chocolate-coins.html

3. From Consumer Reports:
http://www.consumeraffairs.com/news04/2008/10/chinese_formula07.html, and
Candy problem verified on Snopes:
http://www.snopes.com/food/warnings/coins.asp

4. http://www.usatoday.com/news/health/2008-09-24-melamine-china_N.htm

5. "Consumers exposed to tiny amounts of melamine shouldn't worry, says
Angelika Tritscher of the World Health Organization. 'Melamine at low
doses is actually not considered to be very toxic.'" Quote from:
http://www.usatoday.com/news/health/2008-09-24-melamine-china_N.htm

6. http://www.consumeraffairs.com/news04/2008/10/chinese_formula09.html

Wesco 2008 brief notes

I just returned from the Wesco Annual Meeting. I will post more detailed notes in the next few days.

I am always amazed at how witty and wise Charlie Munger is. My ambition is to be like him in my 80’s—wise and a billionaire! (CM is by his own admission pompous too, but I have that part down cold!)

His introductory talk and his answers turned on three general themes—old fashioned values, systemic problems and lower returns

--Old Fashion Values

He is old fashion and he believes that old fashioned values really are better than the “rot” we have now. The values that Bank of America, accountants or investment bankers used to have would not have allowed the types of awful behaviors that we have witnessed lately. The accountants blessed accounting that allowed both sides of a zero sum derivative trade to record profits. They blessed accounting that allowed a bank to issue a security and then record a profit on that issue, because the bank’s credit was so weak that upon issue, the value of the security was such that they could buy it back at a discount! At Salomon, he intervened over some similarly egregious accounting gambit. Said Munger, “You will do this over my dead body.” He did win that battle, but the war was lost.

There has been Gresham’s law in accounting with the bad driving out the good.

--Systemic Failures

Systemic failures need systemic solutions. He liked the old fashioned system: a Roman bridge builder had to stand under the bridge when it was first used or tested. Thus builder made sure that the bridge was well made. That made for strong bridges—soundly built to withstand stress. Similarly, Berkshire Hathaway has reserves to back the reserves. The engineering principle is that back-up systems have back-up systems. The financial system need models built to sound engineering standards. As far as Munger is concerned, Alan Greenspan overdosed on Ayn Rand. So, for Greenspan, the financial equivalent of ax murderer roaming about was acceptable part of the free market. CM strongly disagrees!

--Macro Predictions

Departing from the normal, CM made a macro prediction: that the returns from investments will probably be lower. We have lived in a really good time for investments over the last 20 years or so. This will probably not continue. Furthermore, the idea of buying an investment for less than it is worth is spreading, so that making great returns is becoming harder. So expect lower returns.

Random thoughts

Munger looked hale and hearty for his age.

On real estate, he had some advice that is particularly relevant to me or for those of you buying a house in California, the price deflation has not hit the good neighborhoods. I have seen this first hand. I was expecting the prices to drop and they have not!

The three best quotes of the day.

“Ideology will cabbage hook the head of a person.” (For example Greenspan and Ayn Rand)

“General Re needed a derivative book like I needed a case of syphilis”

He and Warren learned a lot from each other, but when asked about disagreeing about investments, well he and Warren are “like old married couple, a couple of grunts and raised eyebrow and what’s the point of talking.”

Best to all!

Learn and compound!

Buffett Watch

In a short interview on CNBC, Warren Buffett talks about the Marmon acquisition and the problems in the financial sector--"people [companies that need capital]know our phone number. And we haven't seen anything we want to move on. That doesn't mean we won't in the next six months."

According to CNBC transcript, Warren Buffett said that he has not seen anything in the distressed financial sector that "that causes me to start salivating."

Quoting Joseph Stumpf, the CEO of Wells Fargo, Buffett said "'I don't know why the banks had to find new ways to lose money when the old ones were working so well.' "

The full transcript is at http://www.cnbc.com/id/22398095.


Health, Happiness and Wealth for the New Year!