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Articles for the week ending January 15th of 2010

Yes, a new year... remains to be seen how the year shapes up...

Blogger has a new (beta) editor and it has kind of disrupted my writing. I typically compose in the HTML mode but it doesn't have a picture insert icon in that mode anymore :( Also, I don't like automatic HTML parsing of the regular "rich text" mode since it messes up something on my page :( Having said that, the advantage of sticking with a hosted platform is that you don't pay for any new updates. The platform continuously improves, albeit a bit slowly, and new innovations are seamlessly incorporated into the platform. Since I have a lot of time to kill these days, I'm wondering if I should change the look. I kind of like my current look—it's very unique—but I wonder if I should change it just to freshen up things ??:|

I'm still trying to formulate my investment strategies for the year. Nothing looks cheap but then again, I have been saying that for 6 months. My performance last year, just like the year before, wasn't too good but I'm satisfied given several events that were unfolding in my life.

You could see what's running through my head by noticing how a lot of the links below are about China. I thought China may have been a big story in 2009 but it wasn't. But the situation over there still makes me think that it will send ripples this year. In fact, I'm thinking of ways to profit from any real estate bust in China. If anyone has any ideas, let me know.

  • Was John Paulson simply gambling? (Felix Salmon for Reuters): In an article for the New Yorker (not freely available), Malcolm Gladwell apparently calls John Paulson the most successful entrepreneur on Wall Street during the last decade and possibly in the post-war era. Felix Salmon's opinion differs. He wonders if John Paulson just gambling? Were his strategies sound? It's an interesting opinion piece but the problem is that one can say this about almost any macro strategy. Nearly all of them are speculative in nature. In some sense, all three that Salmon brings up—John Paulson, George Soros, and Nassim Nicholas Taleb—use speculative strategies to make their living. For what it's worth, I think it's too early to heap so much praise on John Paulson. It was one bet, albeit a huge one, that worked well. It remains to be seen how he performs going forward.

  • (Recommended) China's potential real estate bubble (Business Insider; h/t YSwolinsky): When so many preach bubble, I wonder about the reality. In any case, a slideshow suggesting why China's real estate is in serious bubble territory. People like me are bearish on Chinese real estate mainly due to the lack of affordability (this is also why I'm nervous about real estate in Canada.) The first slide is a good illustration of affordability. How could a "food company manager" afford a $483k apartment, not to mention the person who paid $615k for a similar unit, in a country where the median income is a fraction of what it is in developed countries? According to this news story, the average household income in Shanghai in 2008 was $481/month (approx $5700 per year.) Even if the "food company manager" was making 3x the average and even if you count a two-income houshold, you are looking at around $35k per year, which makes little sense. If you start looking at the $615k unit, then people are really skating on thin ice... I never lived through the Japanese real estate bubble but this is what it must have felt like. I think we know when the Chinese bubble has hit a peak if the real estate value of the Chinese Imperial Palace (in Beijing) is worth more than the state of California ;)

  • Why there is no bubble in China (Shaun Rein @ GuruFocus): I always like looking at both sides of an argument and here is someone who is bullish on China and doesn't think there is anything to worry about. He doesn't change my bearish stance but I think he does make a very important point: in order to avoid taxes, companies may be under-stating worker salaries. That is an important point but, even if the reported salaries are under-stated, the question is whether salaries have kept up over the decade. If real estate prices have gone up 30% to 80% more than salaries in the last 6 years (as a Goldman Sachs study referened in the prior slideshow suggests,) the whole thing may be unsustainable (but it depends of if real estate was undervalued before.)

  • Thomas Friedman: China not a bubble (New York Times): In an opinion piece directly challenging Jim Chanos' bearish views of China, Thomas Friedman of 'earth is flat' fame, suggests that there isn't a bubble in China. I think Friedman makes some important points in defense of the no-bubble thesis but there is something all of us must keep in mind. There is a huge difference between in making the correct investment call, and visualizing the future economy. Friedman's op-ed makes heavy use of anecdotal information, as well first-hand views from Taiwanese entrepreneurs who do business in China. As anyone who has been investing for a while, or has studied history, may know, entrepreneurs, executives, employees, and even citizens on the ground, are very poor investors. If any of them were good investors, they would already be millionaires and wouldn't be working for the company. The reality is that even people who appear to have the most knowledge aren't very good at investing.

  • (Recommended) Geoff Gannon on Kraft; Another piece examining Kraft vs Cadbury (GuruFocus): Geoff Gannon returns to blogging with an article examining Buffett's comments about Kraft. I never looked closely at Kraft but for what it's worth I'm not a fan of mega-caps already priced for their dominance. Sure, they may end up being safe but if you get the pricing wrong, you will bleed slowly to death—sort of like Pfizer or Time Warner investors over the last decade.

  • The re-pricing of stock options by Google and others (Rational Walk via GuruFocus): Ravi Nagarajan touches on an issue I have wondered about for a while. How can companies like Google re-price options for their employees just because the options were out of the money? Yes, there is a higher probability of losing employees—basically these compensation schemes are to lock people to their employers—but why offer options in the first place? Why not provide cash that vests over time or someting?

  • Bill Miller CNBC interview transcript (CNBC; h/t: yswolinsky @ GuruFocus): Miller is sticking with his contrarian bets on companies like GE. Miller is a bit too bullish for my liking right now, and blames the government too much, but I'm still a fan of him.

  • Is Warren Buffett making a mistake with BNSF? (The Globe & Mail): This is a somewhat old article from early December. I wanted to link to it but didn't have enough articles, and was also busy with some personal issues. I think it's sort of an important article so decided to link to it now. It presents some bearish arguments against the proposed buyout of BNSF by Berkshire Hathaway.

  • Value investing professional answers some questions (The Globe & Mail): Another article from December that some may find interesting. I have no idea what Richard Rooney's track record is but this interview with a professional in the field goes over the thinking prevalent in value investors. I'm not a true value investor so I don't follow the same thinking but I always like listening to others being interviewed.

  • (not related to investing) E-reader buyer's guide (BusinessWeek): Too expensive for me but I love them the same. Some think e-readers will be killed by tablets but I am not so sure. If e-readers are much cheaper than tablets, they will survive. After all, modern phones can play music but people still buy the iPod. If Amazon cuts the Kindle's price below US$100 later this year, as some expect, it would bring it within reach of the masses. The only question is whether its proprietary format and limitations is worth living with. Overall, I think the ideal ones are the paper-sized (8"x11.5" or larger) devices from Plastic Logic and Skiff, but they are way too expensive and targetted at executives and professionals. Devices with ability to surf the web, such as those from Spring Design and enTourage, are also interesting... Anyone buying an e-reader now is probably taking a risk since only a few companies will survive but that goes for any new revolutionary technology.

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