Can Turtles Fly?

(source: Image by AFP/Getty Images. Pictured: The cargo ship smashed to pieces just minutes after 31-strong crew were plucked to safety , By Daily Mail Reporter. Last updated at 9:36 AM on 12th October 2008) One of the most volatile industries out there is the shipping industry. The transportation companies, in particular, are very volatile and only a few brave souls will ever invest in them. The stock price charts are volatile enough to scare off most investors. Given the collapse in world trade, it shouldn't be surprising how badly the industry has been hit. The Economist has a story updating us on the present state of affairs: World trade in general remains in its worst slump for generations, although it too is no longer falling. Two of the biggest shipping banks (RBS and HBOS) are in state-backed rehab. The parlous state of the world economy could mean more shipping companies following Eastwind Maritime, which went bankrupt in June. On July 28th Hapag-Lloyd, Germany’s largest ...

Banking was always considered very conservative and "clubby". Although novels and movies suggest bankers are the ultimate capitalists, nothing is further from the truth. Outsiders are never to be trusted, or so it is the opinion projected by bankers. Sticking to their broken model, we get news from The New York Times that Lloyds Banking Group, the British banking giant bailed out by the British government, has appointed Winfried Bischoff as its chairperson. Bischoff, perhaps not surprising to the cynics, was a key player with Citigroup and a big proponent of mega-banking and keeping investment banks intermingled with commercial banks. Readers may recall that I am not a fan of investment banks, which I claim resemble casinos at times, and would prefer that they be kept separate from any commercial banking facility. Bischoff seems to have become a chairperson only in late 2007 but seems to have been a big player in Citigroup's European operations. Here is the word from New...

One of the reasons Japanese stocks are dangerous is because companies are not shareholder-friendly. I consider myself as an OPMI (outside passive minority investor) so I don't expect to influence any company. Nevertheless, I expect the larger shareholders to push for changes if things get really dire. In Japan, that just doesn't happen. Because of this, you should apply a discount to Japanese stocks. (Note: Poor corporate governance does not apply to some large, internationally-focused, companies such as Toyota or Sony. These companies are operated more like American companies, with more independent board of directors and/or outside management, better capital allocation decisions, and so on.) Bloomberg has an in-depth story summarizing the current state of affairs in Japan. It profiles hedge fund TCI—you may recognize it in numerous stories in The Economist—and its difficulty carrying out changes. Who knows if TCI are the "good guys" or were simply out to make a quic...

I'm going to start two new series for those who started out investing in the last few years. The series will be called Newbie Thoughts and Newbie Mistakes . I will randomly write up on issues that others may find useful. They will range from mundane, simple, ideas to interesting ones. Vetern investors may find them lame and may want to skip over the posts. Also, one should take my comments to be the equivalent of the 'blind leading the blind' because, quite frankly, I'm a newbie too :) Know Your Circle Of Competence Once you start investing for real, one of the important things is to know, what Warren Buffett coined as, your circle of competence. Just like in other aspects of life, everyone will have their strengths and weaknesses when it comes to investing. It is very difficult for those who just started investing—say less than 5 years experience*—to say what is one's circle of competence is. After only trying many different strategies will we know if we are cut o...

Jason Zweig writes the weekly Intelligent Investor column for The Wall Street Journal. I don't subscribe to the WSJ but this column seems to be freely accessible on the web every week. Sometimes the articles are good; sometimes they are not. For someone who is a fan of Benjamin Graham, he writes a lot of articles that are more suited for passive investors than stockpickers. Nevertheless, sometimes the articles are pretty good, like last week's. In Under the 'Emerging' Curtain , Jason Zweig tackles emerging markets. More specifically, he quotes some study by Elroy Dimson that shows that fast growing emerging markets produced less profits for investors than slower growing ones. This isn't really news to me—it's like growth stocks versus value stocks—but some may find it surprising (as usual, bolds are by me): Based on decades of data from 53 countries, Prof. Dimson has found that the economies with the highest growth produce the lowest stock returns -- by an imme...

Deciphering the strength of the Chinese economy will also play a major role in formulating our view of any future relative strength of emerging. My colleague, Edward Chancellor, strongly suspects that the Chinese economy is dangerously unbalanced and very likely to come unhinged in the next few quarters, surprising the pants off investors. — Jeremy Grantham, July 2009 GMO Quarterly Letter Edward Chancellor, assuming it's the same person, is the author of Devil Take the Hindemost so he knows his stuff—at least when it comes to history. Is there really a risk that China may face serious problems within a few quarters? The important point, as Grantham suggests, is that this will be a big negative surprise for the markets. The most at risk, as usual, as those overloading on cyclicals (such as commodity businesses or capital goods companies.) Although some seem to follow China by observing its stock market, that is totally meaningless as far as I'm concerned. The stock market in...

Ambac warned of huge losses, before it hosts an earnings call on August 5th. MarketWatch reports: Ambac Financial Group shares dropped 13% Tuesday after the bond insurer said it's likely to lose about $1.3 billion and will stop paying interest and dividends on some securities. Additionally, the company said that its Ambac Assurance unit has asked regulators for permission to release a big chunk of rainy-day money known as contingency reserves. Without that, the unit would have negative statutory capital of more than $1 billion. ... Ambac said its Ambac Assurance unit expects to report estimated statutory impairment losses on credit derivatives jumped $1.6 billion to roughly $4.9 billion during the second quarter. The unit will also incur about $800 million in statutory loss and loss expenses in the period, the company added. The increase in impairment losses were driven by problems with the guarantees that Ambac Assurance sold on CDOs that held asset-backed securities. One problem...

Honestly, it's difficult to say what is happenning in China. Usually it's hard to discern the reality for any developing (or undeveloped) country but it's even more confusing given how China runs a totalitarian state and there is only one media (technically, they do permit other sources but they are tightly controlled.) The big question being raised these days is whether China's stimulus programs are setting the stage for massive bubble formation. China is spending around 25% of GDP to stem the credit bust and the subsequent collapse in world trade. Bears like me already think there may be bubbles in fixed-assets like real estate, factories, malls, and so forth. But even if you didn't believe bubbles exist now, are they being created? Vitaliy Katnelson recently wrote an article for Foreign Policy painting a negative picture that some of you may find interesting. Admittedly, Vitaliy has been bearish on China for a while and been completely wrong (like me) so don...

If someone is looking for an answer, let me say straight up that I don't have a testable answer. There isn't much public data available on long-short or market-neutral strategies; someone in the shadow world (i.e. hedge funds) would know a lot more and have more concrete data. In a post I made earlier in the year suggesting that value investing may underperform if we end up in a scenario like the Great Depression but it may do ok if we end up like Japan—to confuse everyone, I'm not even sure how true that is and I wonder about Montier's suggestions—reader R. Soul suggests that long-short equity funds should do well in an environment like the Great Depression. I would throw in market-neutral strategies into the discussion as well. How good are those strategies? Benjamin Graham ran something close to a long-short fund with a long bias in the late 1920's/early 1930's. He got wiped out during the Great Depression because he was net long and used leverage. Graham su...

This was going to be a quick article referencing a story about how derivatives are concentrated in a few banks in America. Well, it turned into an opinion piece... Once upon a time in America, there were thousands of banks and assets were distributed more widely across those banks. Well, unlike countries like Canada, there are still thousands of banks in America but the assets are concentrated in a few major banks. My understanding is that the so-called "New York banks" had sizeable assets a hundread years ago but that pales in comparison to the present situation. This basic history lesson, admittedly from someone who is neither a historian nor an expert on banking, is important in light of the following story. Naked Capitalism pointed me to a story from CFO magazine about the concentration of financial derivatives in America : Members of Congress probing threats to the global financial system — especially the threat of concentration of risk — will have a lot to ponder in ne...

The post where I was speculating on Seth Klarman's performance generated a lot of interest. A lot of it was due to the excellent blog, Distressed Debt Investing, picking up the post . Everyone has their own view on performance evaluation—some don't even think you can compare performance—but I want to address one point that was raised by several people. It has to do with Klarman holding high levels of cash. Several people feel that Klarman should be looked upon more favourably because he holds high levels of cash. What do the rest of you think? Is Klarman being handicapped by his cash levels? My answer, which is strictly my opinion, will probably be controversial. My view is that I would not give a bonus to Klarman just because he holds cash. The way I look at it, what matters in the end is the actual performance. If you were risk-averse, you may value cash but I personally don't. If one used debt, then I would be a bit wary but it depends on the levels. Holding cash will be...

Illustration by Charles Barsotti for the New Yorker. Illustrated books and other gifts available from New Yorker's Cartoon Bank .

(This post has nothing to do with investing; if you are interested in science, do check out the fascinating essay.) (Illustration by Barry Blitt for The New Yorker ) In mid-2008, writing for The New Yorker, Malcolm Gladwell, arguably one of the top writers in America, wrote an essay that questioned the commonly held view that innovation is rare . Titled In the Air , it is a fascinating piece that, as is usually the case with any of his works, happens to be provocative and somewhat controversial. Skeptics of Gladwell always accuse him of extrapolating small observations into large, all-encompassing, hypotheses. I am a big fan of Gladwell—I actually haven't read any of his books yet; I find his essasys in The New Yorker or other publications to be more interesting—and admit that Gladwell has a habit of painting with a broad brush. What I love about his writing is how he turns over stones and shines the light on seemingly minor issues that society ignores. He tries to connect ...

Read a whole hoard of articles on the Eclectica website and Hugh Hendry is really into technical analysis. Although I like his macro views, his investment style is not attractive to me. Here is some tidbit from the Feb/Mar 2006 Hedge Fund Journal article (as usual, any bolds in the quote are by me): A key point here is the importance of technical analysis to both Hugh Hendry and OAM. For some years veteran chartist Brian Marber had provided a technical input on markets/stocks/sectors to the investment professionals at OAM. Through the course of time Hendry came to recognise that he was placing more reliance on the chart patterns and levels than his mentor Odey. Just as Hendry was increasingly relying on technical signals to tell him he was right (or wrong) on the timing or correctness of his market and stock views ... ... What is Eclectica Fund? It is described by its management company as “an opportunistic fund investing in global equity, fixed income, currency and commodity markets...

I remarked recently that I ran across the Scottish CIO of Eclectica Asset Managament, Hugh Hendry, and was quite impressed by him. He reminded me of the first time I encountered Marc Faber, who incidentally had a huge impact on me. Like Faber, he is outspoken, quite controversial, and a bit arrogant (I don't like his arrogance though.) Most importantly, however, Hugh Hendry, like Faber, seems to have a good understanding of investment history. I would say that Faber knows a lot more than Hendry but Hendry seems good as well. Interestingly, Marc Faber and Hugh Hendry are both skeptical of central bank actions but they take completely opposite views: Hendry is a deflationist while Faber is a hyperinflationist (do note that they may change their opinions over time.) I did some research on Hugh Hendry to see if he is actually someone worth listening to. Not being part of the hedge fund world or having access to his hedge fund letters, I am limited to his public writings and appearance...

I don't hit Zero Hedge that often—it's really for professionals or traders—but I found it kind of funny that Charlie Gasparino of CNBC actually called out Tyler Durden of Zero Hedge . Obviously, Charlie never saw the critically acclaimed film Fight Club or heard of the book it was based on... One of the difficulties for a business television station like CNBC, or its employees, is that it is in the entertainment business. Without keeping things entertaining, they won't make much money. Yet, at the same time, they touch on important issues. I see a lot of people bashing a station like CNBC yet they are precisely the ones that keep watching stations like that and paying for it (or contributing indirectly to advertising.) No one bashes Bloomberg or Fox Business Network (or Business News Network in Canada) because, well, no one watches them; they are not entertaining...

From The Globe & Mail : Canada's recession is over, and the country is beginning what will be a long reconstruction of the wealth destroyed by the financial crisis, the Bank of Canada said Thursday. Gross domestic product will expand at an annual rate of 1.3 per cent this quarter, compared with an earlier forecast for a contraction of 1 per cent between July and September, the central bank said in its latest monetary policy report. The dramatic shift is the result of stronger financial conditions, surprisingly high consumer and business confidence and a first-half contraction that was less severe than the economic catastrophe the central bank was bracing for when it last published its views on the economy in April. If the bank's new forecast proves correct, Canada's first recession since the early 1990s lasted three quarters, making it one of the shortest downturns on record. This would be a pretty short recession in Canada. Unlike USA and most of Europe, Canada avoided...

This is the type of story that very in North America is aware of, yet can portend to huge changes: For all the talk this year about the Chinese refusing to buy U.S. bonds, the real story is about the People’s Republic of China’s failure to find buyers for the equivalent of $1.7 billion of its debt because too many investors showed no interest at auctions that would be considered disastrous if their outcomes were repeated on Wall Street. Other Asian countries face similar difficulties. India’s underwriters had to purchase 3.1 billion rupees ($64 million) of 25-year securities they were unable to sell at a July 10 auction. Vietnam and the Philippines abandoned offerings because investors demanded higher yields than the governments were willing to pay. China’s 11.9 billion yuan in unsold short-term debt represented 14.3 percent of the 83 billion yuan it offered in three sales this month. A lot of people who bash the US sovereign debt don't realize how attractive it is compared to eme...

I see some value investors suggesting that Seth Klarman is in the same league as Warren Buffett. How good is he? Quite frankly, I know very little of Seth Klarman so my comment should be taken in that light—namely, a distant observer with limited information. Institutional investors and others in the hedge fund world will have a better, truer, picture; but I have to go with what I have. I have no idea what Klarman's performance in the last decade has been. But I did run across the Baupost Fund letters in the 1990's —I think I linked to them before but if you haven't seen them, do check them out—and let's look at how he performed. If we go with the latest available information, at least to me, it is the 2001 letter. I extracted the performance table, which represents inception to 2001, which is around 10 years, from that letter: Well, you can get a feel for an investor's skill and investing style from long-term performance. It's sort of like looking at a 10 year ...