Articles for the week ending May 23, 2009

Some articles that you may find interesting, in no particular order:

  • Which economic indicators are important? (The Globe & Mail): A nice article that speculates on economic indicators that are useful, and those that may not be so. Even though I'm macro-oriented, I don't really pay regular attention to economic indicators. I think they are only useful in developing a rough idea of whether the world, or a country, or an industry is "good", "bad", or whatever. As for timing, or trying to pick sectors or stocks, they confuse me more than anything.
  • David Rosenberg Q & A (The Globe & Mail): David Rosenberg was the senior economist at Merril Lynch who recently moved to a firm in Canada. I used to have access to his reports through my discount broker (HSBC) but not anymore. He was pretty good IMO. He was mildly bearish—but not superbearish like Stephen Roach at Morgan Stanley—throughout the last few years and I'm sure he saved his clients some money. He maintains his reputation with an out-of-consensus bearish call on the economy. He thinks the economy won't recover as quickly as many imagine. If you share similar views, the thing to do is not to go and short sell stocks (unless you are good at that.) Rather, I think we should build more pessimistic estimates into company earnings, growth rates, and things like that.
  • Be careful with rare coins on E-Bay (Financial Post): I'm not that familiar with history but I can't think of another time period in human history when counterfeiting was so big. Particularly because of advances in technology and low manufacturing costs in China, almost anything is being counterfeited. This story deals with counterfeit rare coins bought on E-Bay. If you are buying coins, be careful; I'm not really sure how you can tell in advance.
  • Are the Chinese GDP numbers overstated? (The Economist): It's hard to say if the GDP numbers coming out of China are too high or not. I don't know about the current (or near-term) numbers but the long-term historical numbers don't make any sense to me (as I have mentioned before, it's hard to imagine a country that can grow around 9% to 10% real (probably 10% to 15% nominal) for a long period of time.) According to some private analysts the article references, the numbers may have been overstated in the past, but they seem more accurate now. If the past GDP is lower than official reported, it's actually bullish in my eyes (because it means that misallocation of resources or any bubble is likely to be smaller—instead of super-charged bubbly growth, it would be slower, more rational, growth.)
  • Citigroup quadrupling its share count (Fortune): Citigroup takes a page out of penny stocks and quadruples its common shares (by converting preferreds to common.) I wonder if this might set a record for a large-cap company (Citigroup's market cap is still $20+ billion.)
  • Obituary of the real estate bust - Florida residential golf resorts (New York Times): I didn't even know there were such a thing—I guess it's mostly for the wealthy—but it looks like residential golf resorts also seem to have been in a bubble and are bursting right now. NYT profiles a key player in the Florida region and goes over various problems faced by his network of companies. The story also touches on some unethical practices—denied by the accused actors—seemingly used to loot private equity investors. I have talked about the possibility of massive unrecognized losses at private equity funds but I wonder how many funds also involve unethical practices that allowed employees and advisors to profit at the expense of the investors. Private equity is not very transparent so it remains to be seen what comes of all this.
  • (recommended) A discussion among economists on the current crisis (The New York Review of Books; thanks to Conscience of a Liberal for pointing it out): I haven't read it yet but it looks a good discussion between economists on the current crisis. Although some look at the economics profession in negative light, given the collapse of the world economies and the financial crisis, I actually think it's great to see serious debate in economics. We are going to see revolutionary ideas come out of the current crisis.
  • Snowball plus two other books reviewed (The New York Review of Books): I have little interest in Snowball, the Warren Buffett biography, and have it near the bottom of my list. I'm just starting out and a slow-reader so I have a ton of other books to read first (it also shows how I'm not a hardcore Buffett fan ;)). But I do love reading reviews of books. This might strike some as the dumbest and most unproductive thing ever—why not spend the time reading the actual book instead—but there is some enjoyment in reading well-written essays (I'm probably one of the few who enjoys reading essays or long reviews of movies, many I still haven't seen :)). Well, this New York Review of Books piece pulls ideas from Snowball and essentially examines what made Buffett sucessful. Building on the notion of success, the review also looks at Malcolm Gladwell's views in his latest book, Outliers, as well as Geoff Colvin's Why Talent is Overrated. If you want an interesting read check it out; but if you are looking for something primarily dealing with investing, business, or economics, skip it.
  • Snowball review by Portfolio from last year (Portfolio; 4 parts): If you do want a good look at Snowball, especially if you are evaluating the merits of it, you should check out the multi-part review from Portfolio last year. As Felix Salmon, who writes the first part, mentions, the book is really more of a biography and doesn't really delve into why Buffett did what he did.
  • Mohnish Pabri lecture at Columbia Business School (Columbia Business School; thanks to ValueHuntr): Pabri had a horrible year but he is generally very transparent with his methods and his strategies. I'm still not sure how good of an investor he is. I put him in the camp as David Einhorn, William Ackman, Jim Rogers, and Marc Faber. That is, someone who is pretty good and much better than average, but with spotty record and question marks over their dependence on certain economic or business environment.
  • (Highly recommended) Notes from Value Investing Congress - West [part 1 - part 2 - part 3] (Cheap Stocks): Summary of various investment ideas and thoughts from up-and-coming value investors.
  • The saga of Porsche & Volkswagen (The Economist): The squeeze of short-sellers by Porsche was a risky strategy. I said it was one of the greatest investment actions last year but it is not for the faint of heart. It is still unclear if Porsche can successfully complete the takeover; failure may result it it destroying itself (In one of his best posts, John Hempton of Bronte Capital laid out, late last year, why the Porsche strategy was very risky and can end up bankrupting the firm if it fails.)
  • Outsourcing of a different type: agriculture (The Economist): The Economist asks, "Rich food importers are acquiring vast tracts of poor countries' farmland. Is this beneficial foreign investment or neocolonialism?" I'm free-market-oriented and think the idea of rich countries (like South Korea or Saudi Arabia) acquiring agricultural land in poor countries (like Ethiopia or Mozambique) is benefitial. However, the problem—a point most free marketers on the right seem to ignore—is that many poor countries have corrupt governments that do not benefit the poor, who tend to be reliant on agriculture. FDI (foreign direct investment) in poor countries' agriculture can revolutionize these countries like FDI in manufacturing has done to Asia. But how to do it without all the profits accruing solely to the corrupt governments (and the investors)?
  • Jeremy Grantham 1st quarter 2009 letter (GMO): I was thinking about commenting on it but didn't find anything worthwhile. He basically says that the market will rally much further but it may not be for fundamental reasons.
  • (Recommended) Berkshire Hathaway Q&A with the media(??) (GuruFocus): I haven't seen this before and I'm not sure what this is; I assume it's a media Q & A with Warren Buffett. In any case, the questions are very good and cut to the key points.

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4 Response to Articles for the week ending May 23, 2009

John Y
May 28, 2009 at 9:13 AM

@Snowball: Me too. I'm not at all interested in it. By the way, which books are you reading at the moment? (Have you added Taleb's to your list?! ;) ) I'm slowly going through Security Analysis... 
p.s. I've added the initial of my surname to the nickname so you can tell which John I am.

May 28, 2009 at 11:34 AM

Thanks for picking a unique handle. It's confusing otherwise :-P
As for books, I have not read any of Taleb's works. I am not a big fan of Taleb. This doesn't mean I disagree with this theories or his writing. Rather, my impression (without having read his books) is that his works are more useful for risk managers on Wall Street or academics or senior management watching their firms. My feeling is that his books may not be too helpful for amateur investors. I could be wrong but having flipped thorugh his books, listened to him speak, and read some of his articles, that's my feeling.
For instance, one of Taleb's core arguments deals with risk in the context of probability distributions, such as the normal (Gaussian) distribution. The thing is, someone like me does not measure risk in that manner. In fact, I don't even look at my portfolio as being vulnerable to fat-tail distributions or not. Many professionals, especially those running investment banks, do use probability in their risk models but I don't.
Taleb's works may also be useful if you use derivatives (such as options.) The Black-Scholes model used to price options uses probability distributions with a bunch of assumptions. I think Taleb's insights may be more useful in these cases. Maybe some option positions over-price risk while others under-price risk. But I don't deal with these.

May 28, 2009 at 11:56 AM

I think if you are a value investor or any sort of stockpicker, you should read Security Analysis or a similar book (some of Martin Whitman's books may be substitutes--don't know). I have to say I have not read Security Analysis yet. I took some finance courses when I was in University (but not value investing oriented) so I know some of the basics. I am also more macro-oriented, rightly or wronly, and hence spend more time in that area. If you are a pure value investor or one that is primarily a stockpicker, I would read Security Analysis (or a similar book) before other stuff.
Lately, I have been reading macro-oriented books. Some of them aren't that great but are more enjoyable to read. I usually mix serious stuff with some light stuff.
I borrowed Trouble with Prosperity (Jim Grant) from the library but have to re-borrow it. This is more of a historical look at the past. It's useful if you are macro-oriented and interested in how things were, say, during the Depression, or after WWII.
The main one I am reading now is Anatomy of the Bear (Russell Napier). If you are macro-oriented, this is a must in my opinion. It covers the bottom of four major bear markets. It won't give you any tools to improve your stock-picking or bottom-up analysis but if you are total newbie on history, like me, it gives perspective. Some may find it kind of boring since some of it seems repetitious, but I found it insightful.
My next, continuing the macro streak, will probably be Deflation (Gary Shilling). Shilling wrote this book on deflation in the 90's and was completely wrong for a long time. It's still not clear how right he is--consensus seems to think that the prudent decision now is to protect against inflation, not deflation--but I want to be prepared in case deflation is the new norm. I had been trying to find any books on deflationary Japan (because I have a feeling USA may follow a similar path, but more milder here) but couldn't find any. This Shilling book is the only one that seems to deal with deflation.
I also spent some time reading through Martin Whitman's past shareholder letters (you should be able to access them from the Third Avenue site). I had them printed out a long time ago but never spent much time on them. You might want to check them out if you want other than a book that you can read one article at a time or something.

John Y
May 31, 2009 at 9:41 PM

Thanks for the pointers, Sivaram.
I'm at Chapter 6 of Security Analysis. I have to say, saying this book is a must-read is an understatement. Previously, I read various value-oriented books which tre to distill Graham's and Buffett's approaches into more concise key concepts for layman. Now I can say this is not possible. In Security Analysis, I learn something in each paragraph.
Btw, the 6th edition helps a lot in understanding Graham's writing, because each section contains a new forward written by a famous investor putting the text in its historical context.

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