Buffett and Gold

                             

                                     Buffett and Gold

The debt continues to rise and the hardliners continue to predict inflation. No inflation has occurred. This discrepancy between predictions and reality has gone on for decades. A new thesis now preaches debt means nothing. The days of the bond vigilantes are over.

Warren Buffett has not been a fan of gold. There has been a belief that investing in gold was akin to betting against America. But things may be changing. According to a filing released Aug. 14, Berkshire Hathaway bought about 21 million shares of gold miner Barrick Gold, spending about $563 million.

Buffett’s conversion to gold might be a signal for other stock market investors. But some things stay the same. The company pays a dividend.

Burry

The turkey was fed and sheltered for 1000 consecutive days, but this did not mean the butcher loved him.--anon


Mom went down to West Virginia and saved the deal that was crumbling.
Howison's Neurokinetics is being bought by the owner of the Ottowa Senators with plans of taking it public in an IPO. Interesting deal and Mom has a piece from what she earned a few years ago in a placement she did. She's had a good week.
This Vasquez thing is a PR disaster. Their best starter is in the OR, their best player, an All Star, is in jail.


 In April 2016 most major media outlets ran a story implying that 93% of the Great Barrier Reef, the largest in the world, was “dead”, “nearly dead”, or “dying” Thiswas all based on a report that 93% of reefs in the northern section had “some bleaching”.“Some” could be only 1 percent. And bleaching is not death or even dying. It is a normal occurrence during periods of high heat and the coral usually recovers. Of course, as with all species, some are dying and others are being born at any given time. It is well known that the world’s warmest oceans are in the region of Indonesia, the Philippines, and the Solomon Islands. This area is called the Coral Triangle and it harbors the world’s largest number of coral species and the largest number of reef fish and other reef dwellers. Surely this puts to rest the assertion that the world’s seas are “too hot” for coral reefs due to climate change. Nope.

I am so tired of Snowden.

Deflationary pressures on terrorism and violence. Billions of dollars spent by Saudi Arabia on cutting edge Western military hardware mainly designed to deter high altitude attacks has proved no match for low-cost drones and cruise missiles used in a strike that crippled its giant oil industry.

The destructive strike on Saudi Arabian oil production facilities on Saturday, almost certainly carried out by or on behalf of Iran, brings the Middle East a step closer to general war. The long-anticipated test of President Trump’s crisis-management skills might be at hand. It’s a scary thought. Here’s an even scarier one: Suppose the United States reached this moment without ever having taken advantage of the innovative oil and gas production technique known as hydraulic fracturing, or “fracking,” which enabled drillers to free up previously inaccessible hydrocarbons from shale formations in North Dakota and Texas, among other places.--Charles Lane’s op-ed in Washington Post




On this day in 1975, newspaper heiress and wanted fugitive Patty Hearst was captured in a San Francisco apartment and arrested for armed robbery.



                              Burry

Michael Burry,  the semi-crazy physician hero of “The Big Short,” gave a sort of interview (over emails) to Bloomberg. He has made some new assessments. 

He has sold his water holdings. They have become too popular.

He is looking for Asian stocks. He believes the general group has been unreasonably sold.

Specifically, he likes Japan. He is a big believer in the continued growth of remote and virtual technologies, particularly in Japan. The global retracement in semiconductor, display, and related industries has hurt the shares of related smaller Japanese companies, tremendously. He expects companies like Tazmo and Nippon Pillar Packing, (another holding), to rebound with a high beta to the sector as the inventory of tech components is finished off and growth resumes. About half of all Japanese companies under $1 billion in market cap trade at less than tangible book value, and the median enterprise value to sales ratio for these companies is less than 50%. 

Now this. “Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies -- these do not require the security-level analysis that is required for true price discovery.

This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”

“The dirty secret of passive index funds -- whether open-end, closed-end, or ETF -- is the distribution of daily dollar value traded among the securities within the indexes they mimic.

“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different -- the index contains the world’s largest stocks, but still, 266 stocks -- over half -- traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”

So the small market small caps, bought to mimic a market or group, are not bought for value. And they will be very hard to leave if selling starts.

Five Charts

“If you don’t want a man unhappy politically, don’t give him two sides to a question to worry him; give him one. Better yet, give him none. Let him forget there is such a thing as war. If the government is inefficient, top-heavy, and tax-mad, better it be all those than that people worry over it. Peace, Montag. Give the people contests they win by remembering the words to more popular songs or the names of state capitals or how much corn Iowa grew last year. Cram them full of noncombustible data, chock them so damned full of ‘facts’ they feel stuffed, but absolutely ‘brilliant’ with information. Then they’ll feel they’re thinking, they’ll get a sense of motion without moving. And they’ll be happy, because facts of that sort don’t change.” ― Ray Bradbury, Fahrenheit 451

Good Friday. Chris had a tougher day yesterday but is still doing very well.
Mom and Mrs. Buchman went to the movies, The Aftermath, and both liked it. (Keira Knightly)
The local sports shows were horrified about how disappointed the Penguin management sounded about their team. Rutherford praised his defense but really was critical of the vets. Listening to them, I have no idea what they will do.
Last night's Washington game was wild.


What does it tell about a culture when people are hoping the President is a traitor? What does it say when a sizable portion of the citizenry thinks it likely? Or believes its own manufactured political smear? What does it mean when the Press and the Democrats are surprised by a report which was publicly summarized the previous week?
Does the presumption of innocence still apply here? Barr was attacked by the Press for obscuring a report that was to be released 90 minutes later. Schiff claimed knowledge of collusion but Mueller didn't find it; Adam Schiff is the chairman of the House Intelligence Committee.
Can you have collusion involving events that are not criminal, or when does defending yourself from an unjust accusation become obstruction? A lot of politicians are saying that this event casts a cloud over Trump; they may be underestimating the size of the cloud. I wonder if attacking Barr is a good plan; he looks like a guy who might take an attack on his integrity seriously. And maligning Barr for Mueller's report is pretty weird. But the weirdest was the “does not exonerate” quote Mueller threw in; has such a thing ever been done before? Or is it just a pandering self-serving judgmental non-sequitur?
Maybe Diogenes had no high aim of finding an honest man, maybe he was just looking for a grownup.

National Enquirer, along with two of its sister publications, will be purchased by the head of Hudson Media, whose family used to own the Hudson chain of airport newsstands.

The two new changes to damage savers and to punish people who believe government, the SECURE act and RESA, are both getting some popular press. Under the SECURE act, non-spousal beneficiaries would have to take out all the money within ten years. The Senate version forces all distributions to occur over five years if the account is worth more than $400,000. Make all the previous posturing about retirement, lies.

The offer of money to rebuild Notre Dame has inspired criticisms of inequality and white privilege.

"In 2014 alone, the U.S. government misspent or lost over $125 billion of taxpayer monies." I read this recently and thought it an outrageous exaggeration. Then I read this: Using public data from federal databases, Mark Skidmore, a professor of economics at Michigan State University, found that $21 trillion in unsupported adjustments had been reported by the Defense and Housing and Urban Development departments between 1998 and 2015. these are astonishing numbers, astonishing incompetence and criminality. That’s about $65,000 for every American. That's the debt.

Big day in history. On this day in 1775, 700 British troops, on a mission to capture Patriot leaders and seize a Patriot arsenal, marched into Lexington to find 77 armed minutemen under Captain John Parker waiting for them on the town’s common green. British Major John Pitcairn ordered the outnumbered Patriots to disperse, and after a moment’s hesitation the Americans began to drift off the green. Suddenly, a shot was fired from an undetermined gun, and a cloud of musket smoke soon covered the green. When the brief Battle of Lexington ended, eight Americans lay dead or dying and 10 others were wounded. Only one British soldier was injured. But that battle led to Concord later in the morning, then the retreat to Boston. The American Revolution had begun.

Concord Hymn

BY RALPH WALDO EMERSON

Sung at the Completion of the Battle Monument, July 4, 1837

By the rude bridge that arched the flood, 

   Their flag to April’s breeze unfurled, 

Here once the embattled farmers stood 

   And fired the shot heard round the world. 

The foe long since in silence slept; 

   Alike the conqueror silent sleeps; 

And Time the ruined bridge has swept 

   Down the dark stream which seaward creeps. 

On this green bank, by this soft stream, 

   We set today a votive stone; 

That memory may their deed redeem, 

   When, like our sires, our sons are gone. 

Spirit, that made those heroes dare 

   To die, and leave their children free, 

Bid Time and Nature gently spare 

   The shaft we raise to them and thee.

                                   Five Charts


Populations

It was as recently as 2012 when the number of couples without children globally surpassed the number of those with children.

Taxes in a Vacuum

Sowell's argument that taxes are only numbers and do not predict returns because it does not know the taxed victim's response is no better seen than in this graph:



So many of these government plans and ideas depend upon a static, unresponsive community. Most governments deny the very existence of incentives, whether positive or negative. Government sees its citizens as slugs.


Specific Population Declines

The decelerating pace of population decline has made Japan, once a thriving empire and global economic powerhouse, the country with the highest rate of natural population decline in the world. Some European countries, including Bulgaria and Romania, are seeing their populations decline at a faster rate, but this is mostly driven by immigration. The pace at which Japan's population is declining has even outpaced Venezuela, even as widespread starvation and societal collapse have driven millions of people out of the country over the past five years.

Long vs Short Term holdings of stocks:

Police Deaths

Buying the Dip VS. DCA

Timing doesn't work.
 
 

 
 
 
Here’s a graph of the performance of "buying on market weakness" versus "Dollar Cost Averaging:" 

Investing Demographics

Current investment philosophy suggests diversifying out of the U.S. and Europe. Here are a few reasons why:

Earnings from U.S. companies increased 4.5% in the U.S., 25% overseas.
India and China’s share of world GDP has increased six-fold since 1970.
The G7 nations share of global trade has declined from 50% to 30%. 
Populations in the West are aging rapidly. In the US alone, 10,000 people turn 65 every day… and will do so for the next dozen years. An aging population means less economic activity.
Over one-third of US jobs are expected to be automated over the next decade. But automation and advances in technology aren’t just affecting manufacturing workers. For example, financial jobs are very vulnerable.

Compounding

“If you had invested just one penny — forget a dollar — one penny! — at just two percent interest — forget five per cent or ten percent — two percent! — [slight pause, as it sank in] — the day Christ was born — [longer pause, for laughter] — how much do you think you would have today?

“Anybody?
“Anybody?  [no one ever ventured a guess]
“If you had guessed one point two five TRILLION [pause for effect] — DOLLARS! not pennies!!! — [longer pause to allow audience minds to be blown, my own arms suspended, as if holding an invisible watermelon in front of my face . . . then slowly drop left hand] — you would be LOW [right index finger jabs triumphantly on the word “low”] by a factor of a thousand times.  [Satisfied silence.  I have made my point.]
“Lesson number one: slow but steady does indeed win the race. "
(From an old talk by the financial writer Andrew Tobias)

Buffett

Every year Warren Buffett has an annual meeting where he discusses the results of his public company's holdings. He also writes a letter summarizing these results. This is an excerpt:

Charlie [Munger] and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back.

.........

Last year, at the 90% mark, I gave you a detailed report on a ten-year bet I had made on December 19, 2007. (The full discussion from last year’s annual report is reprinted on pages 24 – 26.) Now I have the final tally – and, in several respects, it’s an eye-opener.
I made the bet for two reasons: (1) to leverage my outlay of $318,250 into a disproportionately larger sum that – if things turned out as I expected – would be distributed in early 2018 to Girls Inc. of Omaha; and (2) to publicize my conviction that my pick – a virtually cost-free investment in an unmanaged S&P 500 index fund – would, over time, deliver better results than those achieved by most investment professionals, however well-regarded and incentivized those “helpers” may be.
Addressing this question is of enormous importance. American investors pay staggering sums annually to advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s worth? Indeed, again in the aggregate, do investors get anything for their outlays?
Protégé Partners, my counterparty to the bet, picked five “funds-of-funds” that it expected to overperform the S&P 500. That was not a small sample. Those five funds-of-funds in turn owned interests in more than 200 hedge funds.
Essentially, Protégé, an advisory firm that knew its way around Wall Street, selected five investment experts who, in turn, employed several hundred other investment experts, each managing his or her own hedge fund. This assemblage was an elite crew, loaded with brains, adrenaline and confidence.
The managers of the five funds-of-funds possessed a further advantage: They could – and did – rearrange their portfolios of hedge funds during the ten years, investing with new “stars” while exiting their positions in hedge funds whose managers had lost their touch.
Every actor on Protégé’s side was highly incentivized: Both the fund-of-funds managers and the hedge-fund managers they selected significantly shared in gains, even those achieved simply because the market generally moves upwards. (In 100% of the 43 ten-year periods since we took control of Berkshire, years with gains by the S&P 500 exceeded loss years.)
Those performance incentives, it should be emphasized, were frosting on a huge and tasty cake: Even if the funds lost money for their investors during the decade, their managers could grow very rich. That would occur because fixed fees averaging a staggering 21⁄2% of assets or so were paid every year by the fund-of-funds’ investors, with part of these fees going to the managers at the five funds-of-funds and the balance going to the 200-plus managers of the underlying hedge funds.
 

[The index fund beat the diversified fund of funds handily]

Let me emphasize that there was nothing aberrational about stock-market behavior over the ten-year stretch. If a poll of investment “experts” had been asked late in 2007 for a forecast of long-term common-stock returns, their guesses would have likely averaged close to the 8.5% actually delivered by the S&P 500. Making money in that environment should have been easy. Indeed, Wall Street “helpers” earned staggering sums. While this group prospered, however, many of their investors experienced a lost decade.
Performance comes, performance goes. Fees never falter.

************

The bet illuminated another important investment lesson: Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.

Swensen

ETFs

 

Chief investment officer David Swensen has averaged a 16 percent annual return on Yale University’s investment portfolio, which he built with everything from venture capital funds to timber. He’s been called one of the most talented investors in the world. But lately he’s becoming perhaps even more famous for his advice to individual investors, which he first offered in his 2005 book Unconventional Success. “Invest in nonprofit index funds,” he says unequivocally. “Your odds of beating the market in an actively managed fund are less than 1 in 100.”
And there’s more. A recent entry on the Motley Fool, the popular investment advice website, made the following blanket statement: “Buy an index fund. This is the most actionable, most mathematically supported, short-form investment advice ever.” As long as 10 years ago, in his annual letter to his shareholders, Warren Buffett advised both institutional and individual investors “that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” (Ritholtz)
 

ETFs are beginning to dominate investing. Part is cynicism; people do not believe in experts much any more. And this looks to be true if one follows the performance of individuals who pick individual investments. Generally, no one leader in individual stock investing repeats; the exceptions--like Peter Lynch--are just prominent enough to fool us.

But...it is never easy.

ETFs hold baskets of underlying securities and trade throughout the day like a stock. Most track an index and stray little from their net-asset value, or NAV. But heavy trading and market volatility can compromise that consistency.

Recently, as trading in the three biggest credit ETFs approached record levels amid the market’s biggest losses since 2008, the ETFs’ shares dropped as much as 1.1 percentage point more than the net value of the securities they hold. During that period the two largest high-yield bond ETFs have lost about 6 percent—2 percentage points more than the loss for the Bank of America Merrill Lynch U.S. High Yield Index that they’re supposed to track.

 

So, in fast-moving markets, the price of your ETF may disconnect from the price of the assets it holds. That is to say, worth less than the sum of its parts.

The Market

One always wonders what to do in The Market. Especially now with so much confusion, so many factors. Buy? Sell? Stand aside? There are some statistical generalities.

 

The Dow Jones Industrial Average experiences a bull market correction on average roughly every 12 months, according to the WSJ . The Dow is now up approximately 59% from its last correction low on October 3, 2011 and is on its 32nd month without a 10% pullback.

Still a bull market can run for quite a long time without a pause. The longest period without at least a 10% pullback was during the 1990-1997 run, at 82 months, according to the WSJ’s data group. The usually decline of 10% or more has had an averages of 18 months since 1945.

Since the end of World War II (1945), there have been 27 corrections of 10% or more, versus only 12 full-blown bear markets (with losses of 20% +). This equates to one correction roughly every 20 months, according to John Prestbo. The average decline during these 27 episodes has been 13.3% and they’ve taken an average of 71 days to play out.

Since the stock market’s bottom in March of 2009, there have been only 3 corrections: In the spring of 2010 the S&P 500 began a 69-day drop of roughly 16%. The widely referenced summer correction of 2011 lasted for about 154 days and almost became a bear market. The correction during the spring of 2012 set up one of the greatest rallies of all time, although it was barely a real correction, sporting a peak-to-trough drop of just 9.9% in just under 60 days.

Bull market rallies in between corrections – and there have been 58 in the post-war period – tend to run for an average of 221 trading days before being interrupted and gaining an average of 32%.

But remember, most corrections do not become crashes, and every single one of them have turned out to have been great buying opportunities in the fullness of time.

The Interface of Evil and Incompetence

In an earlier life, I invested in a hedge fund. My plan was that diversity and expertise would outperform the general economy. The investment was successful enough but, as time went by, really no better than an index fund. It is very hard to believe that investing success is immune to intelligence, expertise, experience and some degree of familiarity with the investment world's inner workings--but it is. That experience has soured me generally on the predictive wisdom of experts in all fields.

One element in that investment history was an investment with the Ponzi schemer Bernie Madoff. I was disturbed the fund did so and thought it exposed a casualness that such a fund might develop over time, just the thing I hoped expertise would avoid. The fund managers claim otherwise. They were as surprised as I was. They claim they invested with a currency manager whose regular independent audit showed they were invested in Treasury Bills. When it was revealed that the currency manager had invested in Madoff, my fund sued--not the investor, but the auditor. They recently won their case.

The real lesson here is worse than Madoff. My fund hired auditors to review the investments they held and confirm their veracity. The auditors lied. Lied! Lied as much as Madoff. Just as the government auditors did not pick up on Madoff's obvious scam, the private auditors did not even look at the currency investor's books to see where the investments were.

Sending money to any of such people is a truly hazardous act.

Investing in Pittsburgh

Growth in Pittsburgh’s technology sector is accelerating among venture capitalists, angels and other investors with $437.8 million invested across 177 deals in 2014, marking a 46% increase in dollars and an 19.6% increase in deals over 2013.
VCs invested $332.9 million into 39 Pittsburgh deals in 2014, a 168% increase in dollars invested and a 26% increase in the number of deals over 2013.  This was the highest level of VC investment in the Pittsburgh region since 2001.
Angels invested $72.9 million in 2014, a 35% increase over 2013.
Pittsburgh startups saw $3+ billion in exits over the last five years.

Pittsburgh compares favorably against the 40 largest Metropolitan Statistical Areas in the United States, ranking 11th in investment dollars per capita and 5th in deals per million residents.

Taking La Quinta

A recent story on the company La Quinta and Jim Cramer should be a cautionary tale for all hopeful investors.
La Quinta Holdings is the select-service hotel chain with about 870 locations. Jim Cramer, of the popular investment show "Mad Money," has recommended the stock multiple times, largely because of the positive commentary from the company's long-time CEO, Wayne Goldberg-- particularly as a guest on Cramer's shows. It was as if Cramer felt he had something of a personal relationship with Goldberg and his statements had more weight.

Until last Thursday.

First, the CEO announced he was stepping down effective immediately. La Quinta did not cite a real reason for the exit; Goldberg simply said he had fulfilled his goals and it was a good time to look for new opportunities.

"But if that was the whole story, why not give investors a heads up and announce he's retiring in a few months?" Cramer asked.

This move was especially disturbing to Cramer, as Goldberg had been the president and CEO of La Quinta since 2006. He took the company public in 2014, and then suddenly resigns with no warning, pretty much overnight?

The second blow came when La Quinta cut its full-year financial guidance for the second time in two months. It had a vicious downward revision of its revenue per available room, guiding to a range of 3.5 to 4.5 percent from 6 to 7 percent.

On top of that, the company cut its earnings before interest, taxes, depreciation and amortization forecast to a range of $393 million to $400 million, down from $398 million to $404 million. It blamed weaker-than-anticipated hotel demand during August and September.

The very next day, La Quinta dropped 15 percent, down to its April 2014 IPO price of $17.

Investments are significant ventures often made with people who are completely insincere.

Pao! Kaboom!

Kleiner Perkins Caufield & Byers is a VC firm, a big one with a number of high profile guys (including John Doerr, the firm’s best-known partner.) They see themselves as more than innovators, they see themselves as leaders. When a former partner, Ellen Pao, sued them alleging gender discrimination they did not settle; according to many, they fought because they were offended.
There has been a lot of debate over gender bias in the industry. According to research from Babson College, the percentage of female venture capitalists is now 6 percent, down from 10 percent at the peak of the dot-com boom in 1999. The tech industry is male dominated and engineering is top-heavy with men.
Vignettes emerged in court. Mr. Doerr’s told an investigator that Ms. Pao had a “female chip on her shoulder.” Chi-Hua Chien, a partner, said women should not be invited to a dinner with former Vice President Al Gore because they “kill the buzz.” A senior partner at the time, Ray Lane, joked to a junior partner that she should be “flattered” that a colleague showed up at her hotel room door wearing only a bathrobe.

Ms. Pao is married to Alphonse Fletcher Jr., a Wall Street financier whose hedge fund is bankrupt. Pension funds are suing to recover their money amid accusations of fraud. Kleiner tried to insert Mr. Fletcher into the case, which would have raised questions about Ms. Pao’s motives in bringing suit, but the judge, Harold Kahn, refused to allow it.

Pao lost her case last week.

Siegel and P/E

In 1994 Jeremy Siegel, professor of finance at The Wharton School, wrote "Stocks for the Long Run" which analyzed the behavior of all investment media as far back as their returns could be reliably evaluated. He concluded that for any ten year period, stocks out performed every other investment for that period. Looking at the market in the two decades since, the stock market has continued to average his predicted 6.7% gain, albeit with a lot of volatility. (One can see how panicking in a down market could just murder you.)

Here, however, is a very interesting chart that grades market behavior in decades separated on the basis of the market's underlying P/E ratio: (It may not come through. The essence is that growth is present in every single ten year cycle in the U.S. market with the exception of several ten year segments since 9/11. But the growth, if compared to PE, is remarkably higher in those decades with low PEs. Or, as Graham and Dodd wrote in their classic Security Analysis in 1934:

"Hence we may submit, as a corollary of no small practical important cachet, people who habitually

purchase common stocks at more than about 16 times their average earnings are likely to loseconsiderable money in the long run.")

 

Meltdown

September 18th 2008:
550 billion dollars were withdrawn from money market accounts on September 18, 2008 in less than two hours. Panic began to seep into the market and others withdrew money. The FED could not stop it with an infusion of 105 billion so they shut down the money market accounts and guaranteed $250,000 coverage for every money market account. If they had not done that their estimation was that by two o’clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States. Panic would have increased, threatened Europe and economic failure was in the offing.
Rep. Paul Kanjorski later described this as an "electronic run on the banks".
https://www.youtube.com/watch?v=ODBPlD0FXOU
Now you can not just take money out of a system anonymously. So who was doing it? There must be a record. But this did not seem to be very interesting to anyone. It likely was a reaction to the Lehman collapse and the money was probably not withdrawn but shifted. (I hope not into short accounts, though.) But it would be interesting to see who it was.That, however, is not--or at least should not-- be the point. Kanjorski is implying the system was "attacked." But that subversive motive actually underestimates the problem. The real problem is that malice was not necessary; the system with its high volume computer trading can do this on its own.
 

A Bureau Chokes the Big Cat‏

In 2010 Caterpiller, a large American corporation, abandoned the over-the-road engine market and signed a deal with Navistar to pursue the off-road market.

The deal essentially removed Caterpillar from the highway-truck engine market, which represented 6% of its total engine sales, said Eli Lustgarten, analyst with Longbow Research.

It had been long rumored that the heavy-machinery manufacturer might sell this business, Eli Lustgarten, analyst with Longbow Research, said. Keeping it would have also required significant investment to comply with Environmental Protection Agency emission rules that go in affect in 2010.

So their decision was forced by EPA standards. Something to remember.

Shorting the Future

An interesting criticism has arisen out of the takeover market. A drug company called Valeant that grows by buying others, is trying to buy Allergan, a drug company that grows by developing new drugs.  It’s plan is to boost short-term earnings by  chopping two-thirds out of R&D. So engineering its structure--and cutting R&D--will improve earnings, and probably increase the stock price, but discourage innovation and long term development.
Now this criticism, from a money manager, seems surprised but steel corporations made money for years through depreciating and explicitly not repairing steel facilities because the repairs and upgrades were more expensive and the benefits less than the simple tax write-offs.
Tax distortions are not errors, they are bought and paid for by business and enacted by greedy idiots who do not have our long term financial health in mind.

Advice from Gerald Minack, from the Inside

Gerard Minack, the international analyst from  Morgan Stanley, retired last year. He was very cynical about the investment world and felt the professional investor was in business only because the amateur insisted on competing with him. His general advise was:

No amateur competes well with a professional, be it tennis, golf or investing.

That said, no professional will beat the market consistently.

That inconsistency plus costs results in the consistent observation that the vast majority of professionally managed funds under-perform the basic benchmarks of their class.

The  market can not be timed.

Individual stocks are not quantifiable and are terrible investment choices;

Funds investing in particular asset classes always underperform the general group and the exceptions that outperform do not do it consistently; 

The conclusion: Invest in broad market index funds with low cost. Only. Ever.

The Illusion of Knowledge

Twice a year, Standard & Poor's releases a “SPIVA Scorecard” -- a report comparing the performance of active managers versus three passive indexes. The S&P 500 large caps, S&PMidCap 400 and S&PSmallCap 600 are pitted against the median returns of active managers. The results have been consistent over the years but are remarkable, none-the-less. Active portfolio management consistently fails to do as well as passive index investing. This was true for 12 month, 36 month and 60 month periods.

It gets worse: Success can not be maintained. Only 7% of investment firms who earn in the top 5 percent of companies with similar investment aims repeat in the top 5 percent the following year. The same is true for three year periods.

Actively managed (and more expensive) funds underperform the benchmark performance for their group and, when outperforming them, can not maintain their success. What this means is that unpredictability in the market trumps analysis, even seemingly quality analysis. Investment returns in one firm or another are not reproducible. They are virtually random. Active, good-idea managers can not meet the performance of passive indexing. They are only an expense.

This should be remembered when anyone comes to the point of investing in the market with the illusion of assistance. Or without assistance.
The same caution might well be applied to any modeling.

Warren Buffett's Essay in Fortune

FORTUNE -- "Investment is most intelligent when it is most businesslike." --Benjamin Graham, The Intelligent Investor

It is fitting to have a Ben Graham quote open this essay because I owe so much of what I know about investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me first tell you about two small nonstock investments that I made long ago. Though neither changed my net worth by much, they are instructive.
This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble's aftermath as in our recent Great Recession.
In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.
In 1993, I made another small investment. Larry Silverstein, Salomon's landlord when I was the company's CEO, told me about a New York retail property adjacent to New York University that the Resolution Trust Corp. was selling. Again, a bubble had popped -- this one involving commercial real estate -- and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.
Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant -- who occupied around 20% of the project's space -- was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property's location was also superb: NYU wasn't going anywhere.

I joined a small group -- including Larry and my friend Fred Rose -- in purchasing the building. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I've yet to view the property.
Income from both the farm and the NYU real estate will probably increase in decades to come. Though the gains won't be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.
I tell these tales to illustrate certain fundamentals of investing:

• You don't need to be an expert in order to achieve satisfactory investment returns. But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick "no."
• Focus on the future productivity of the asset you are considering. If you don't feel comfortable making a rough estimate of the asset's future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn't necessary; you only need to understand the actions you undertake.
• If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
• With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field -- not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
• Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: "You don't know how easy this game is until you get into that broadcasting booth.")

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following -- 1987 and 1994 -- was of no importance to me in determining the success of those investments. I can't remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.
There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings, whereas I have yet to see a quotation for either my farm or the New York real estate.

It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings -- and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his -- and those prices varied widely over short periods of time depending on his mental state -- how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.
Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits -- and, worse yet, important to consider acting upon their comments.
Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of "Don't just sit there -- do something." For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.

A "flash crash" or some other extreme market fluctuation can't hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.
During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?
When Charlie Munger and I buy stocks -- which we think of as small portions of businesses -- our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings -- which is usually the case -- we simply move on to other prospects. In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

It's vital, however, that we recognize the perimeter of our "circle of competence" and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a desire to be where the action is.
Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.
I have good news for these nonprofessionals: The typical investor doesn't need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th century, the Dow Jones industrial index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial. The goal of the nonprofessional should not be to pick winners -- neither he nor his "helpers" can do that -- but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

That's the "what" of investing for the nonprofessional. The "when" is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs's observation: "A bull market is like sex. It feels best just before it ends.") The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never sell when the news is bad and stocks are well off their highs. Following those rules, the "know-nothing" investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.
If "investors" frenetically bought and sold farmland to one another, neither the yields nor the prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.
Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway (BRKA) shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's. (VFINX)) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers.
And now back to Ben Graham. I learned most of the thoughts in this investment discussion from Ben's book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase.
Before reading Ben's book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this was fun, but I couldn't shake the feeling that I wasn't getting anywhere.

In contrast, Ben's ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and 20. These points guide my investing decisions today.
A couple of interesting sidelights about the book: Later editions included a postscript describing an unnamed investment that was a bonanza for Ben. Ben made the purchase in 1948 when he was writing the first edition and -- brace yourself -- the mystery company was Geico. If Ben had not recognized the special qualities of Geico when it was still in its infancy, my future and Berkshire's would have been far different.
The 1949 edition of the book also recommended a railroad stock that was then selling for $17 and earning about $10 per share. (One of the reasons I admired Ben was that he had the guts to use current examples, leaving himself open to sneers if he stumbled.) In part, that low valuation resulted from an accounting rule of the time that required the railroad to exclude from its reported earnings the substantial retained earnings of affiliates.

The recommended stock was Northern Pacific, and its most important affiliate was Chicago, Burlington & Quincy. These railroads are now important parts of BNSF (Burlington Northern Santa Fe), which is today fully owned by Berkshire. When I read the book, Northern Pacific had a market value of about $40 million. Now its successor (having added a great many properties, to be sure) earns that amount every four days.
I can't remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben's adage: Price is what you pay; value is what you get. Of all the investments I ever made, buying Ben's book was the best (except for my purchase of two marriage licenses).
Warren Buffett is the CEO of Berkshire Hathaway. This essay is an edited excerpt from his annual letter to shareholders.
This story is from the March 17, 2014 issue of Fortune.