Sunday, November 27, 2011 1 comments ++[ CLICK TO COMMENT ]++

Hugh Hendry discussion at the Alternative Investment Conference

Thanks to Value Investing World for bringing this Hugh Hendry interview to my attention. I may not agree with all the things—short-term orientation of hedge funds is actually worse IMO; the sharp pencil effect doesn't always work—but Hendry is a true contrarian and worth listening. Like Marc Faber or Jim Rogers, you also can't take everything Hugh Hendry says seriously.

I had always felt Hugh Hendry was firmly in the deflation camp but I get the feeling that he is now opening up to high-inflation possibilities. Otherwise, his stance appears to be similar to past opinions.

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Sunday Spectacle CL

Blog updated at 4:31 AM, Nov 27 2011

Sovereign Credit Ratings Interactive Map

note: ratings may not be the very latest so double-check official ratings; also note that the Moody's chart has an additional category ("substantial risks") so the colours for the worst categories aren't the same on all three maps.

Click here for interactive map from




(source: "How Moody's, S&P and Fitch Rate Each Country's Credit Rating," ChartsBin. Downloaded November 20, 2011).

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Thursday, November 24, 2011 0 comments ++[ CLICK TO COMMENT ]++

Jim Chanos' latest thoughts

Twenty minute Bloomberg video of esteemed short-seller Jim Chanos' latest views on USA, China and the current state of affairs. This is sort of like beating a dead horse—at least on this blog—but I think China is an important story if you aren't bearish like me.

NOTE: Bloomberg video has a flaw and the video starts playing automatically for some unexplainable reason.

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Tuesday, November 22, 2011 0 comments ++[ CLICK TO COMMENT ]++

Articles for a November

I just joined Twitter and I can see how people's identities can be co-opted by others. I remember once when Malcolm Gladwell responded to someone asking about a comment of his on Twitter, that he doesn't even have a Twitter account (the point being that whoever that was tweeting using his name was a fake account). It's really hard to tell who is real and who isn't. This isn't a problem for no-name people but it's hard to tell with prominent individuals. Twitter does appear to verify some identities as authentic—for instance, Bill Gates is easy to find and follow—but I'm not sure if the user has to pay for this or not. In any case, it's an interesting world on Twitterland. It is also easy to fall prey to information overload.

Having said all that, here are some articles you may find worthwhile reading...

  • "The End of Borders and the Future of Books" (Bloomberg Businessweek): I can't believe William Ackman wanted to merge Borders and Barnes & Noble at one point — it would have taken down both firms. In any case, a detailed look at the collapse of the second largest bookstore in America.
  • (Recommended) Was Steve Jobs an inventor or an innovator? (The New Yorker): As usual, a thought-provoking, article from Malcolm Gladwell on Steve Jobs. Gladwell continues his long-running view of innovation—you may want to read this post and this one—and the incremental steps involved. In the article, Gladwell calls Jobs a "tweaker" but I think a better word is "innovator." I think the notion of tweaking, as envisioned by Gladwell, can be misunderstood by the general public. You may also want to check out the author interview with Gladwell if this topic interests you.
  • "Financial Reform: Unfinished Business" (Paul Volker for The New York Review of Books): Paul Volker guided the financial reform that is being pursued by the US government—a lot of it is being watered down though—and he presents further thoughts on what need to be done. It's an uphill battle against the status quo.
  • (Highly Recommended) ROIC and growth rates in creating shareholder wealth (Rishi Gosalia for GuruFocus): Excellent article touching on key elements of value creation, including the interplay between growth rates and return on invested capital. I prefer to look at return on equity rather than ROIC but the concept is similar. Study the table included in the article, and notice how, if ROIC is lower than cost of capital (left side of the 10% column), value decreases as growth rate increases (i.e. you actually destroy shareholder wealth as growth rate increases). In contrast, if ROIC was higher than cost of capital (right side of the 10% column), shareholder wealth increases as growth rate increases. I also like the example Rishi uses to illustrate his point in real life. Namely, how Walgreens growing at 14% with 14% ROIC produced less shareholder wealth (16% annual) than Wrigleys growing at 10% with 28% ROIC (17% per year). Having said all that, the difficulty beyond identifying the metrics is to buy a high ROIC (or high ROE) company cheaply. Without looking it up, I would bet that you would have had a hard time buying Wrigley's cheaply whereas Walgreens probably was cheaper more often.
  • (Recommended) The history of Microsoft's Xbox - part 1 - part 2 (VentureBeat): Excellent, lengthy, article on the history of one of the few successful new products by Microsoft in the last decade. Recommended if you are into technology, gaming, or "start-up culture."
  • A look at Canadian microcap, Bennett Environmental (TSX: BEV) (Hardcore Value): Ran across a new Canadian blogger. This is a write-up of Bennett Environmental, which is a struggling, distressed-type, activist play, so anyone interested in such situations should check it out.
  • The evolving television and Internet media landscape (The Economist): I've been studying Netflix lately and this is a good article on the current state of affairs in the media world. Its provides a good synopsis of the various players and what they will gain or lose as Internet video emerges.
  • (Recommended) Book excerpt from Exile on Wall Street by Mike Mayo - "Why Wall Street Can't Handle the Truth" (Wall Street Journal): "Longtime bank analyst Mike Mayo tells the inside story of why it's so hard to yell 'sell' in a crowded room—and lays out how Wall Street needs to change to avoid the next financial collapse." Long-time market followers are aware of the points raised but newbies may want to read the thoughts from an insider on why analysts on Wall Street are, at times, nothing more than cheerleaders.
  • "China Makes, The World Takes" (The Atlantic): An somewhat old, 2007, article on China's manufacturing prowess and the impact on the world.
  • (Highly recommended) Book review of Boomerang: Travels in the New Third World by Michael Lewis (New York Review of Books): Michael Lewis has a habit of painting complex situations with a broad brush but, nevertheless, he often does manage to zero-in on the causes. Some of you may have already read Lewis book or his articles in Vanity Fair but I like reading essays to get a different perspective. Highly recommended.
  • Book review - Google, I love you, I love you not. Reviews of The Googlisation of Everything (and Why We Should Worry) by Siva Vaidhyanathan; In the Plex: How Google Thinks, Works and Shapes Our Lives by Steven Levy; I’m Feeling Lucky: The Confessions of Google Employee Number 59 by Douglas Edwards(London Review of Books): Just like how the public used to debate the power of radio or newspapers about 80 years ago, it's not uncommon to wonder about the power of Google and how much of a threat it is to society. If you are interested in the topic, do check out my prior post on a similar topic.
  • Is there a college education bubble in America? (The New Yorker): Pretty good summary of both sides of the college bubble argument.
  • Book review - Why is higher education failing? Reviews of The Faculty Lounges: And Other Reasons Why You Won’t Get The College Education You Paid For by Naomi Schaefer Riley; The Fall of the Faculty: The Rise of the All-Administrative University and Why It Matters by Benjamin Ginsberg; The Chosen: The Hidden History of Admission and Exclusion at Harvard, Yale, and Princeton by Jerome Karabel; Unmaking the Public University: The Forty-Year Assault on the Middle Class by Christopher Newfield; Crossing the Finish Line: Completing College at America’s Public Universities by William G. Bowen, Matthew M. Chingos, and Michael S. McPherson; Academically Adrift: Limited Learning on College Campuses by Richard Arum and Josipa Roksa; Education’s End: Why Our Colleges and Universities Have Given Up on the Meaning of Life by Anthony T. Kronman; Saving State U: Why We Must Fix Public Higher Education by Nancy Folbre (New York Review of Books): An essay on why universities in America may not be performing well. As the article sort of alludes to, the interesting thing is how the top, elite, universities are world-class but the vast majority of the rest, which is where the vast majority of the future workers are trained, are thought to be under-performing.
  • Top 10 management books of the decade (Strategy+Business): Haven't read any of them but heard of a few. If you are interested in management, strategy, business culture, trade, and innovation, check it out.
  • (non-investing) Profile of Malcolm Gladwell (New York magazine): Lengthy profile of author, Malcolm Gladwell. Some people hate him but long-term readers know that I'm a big fan of his writing, even if I don't agree with all of it.

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Monday, November 21, 2011 5 comments ++[ CLICK TO COMMENT ]++

How good was Bill Miller?

In my prior post on Bill Miller, a reader, McMath, posted a link to a chart at Economicpicdata that appears to make Bill Miller look worse than he actually was. The author at that blog picked some time around 1986 as the starting point and I feel that it misrepresents Miller's career.

Since I'm probably the only remaining fan of Bill Miller ;), I thought I would post what I think is Bill Miller's lifetime performance. I am reproducing below, a Morningstar chart for the Value Trust mutual fund (LMVTX) since 1982. Morningstar is very good with their mutual fund data (unlike, say, Yahoo! Finance) and typically computes real returns properly.

I believe Bill Miller started managing the fund in 1982 but it is not clear how much of the stockpicking was solely up to him in the early days. I really don't know and am ascribing all the performance to Miller. Furthermore, I am not sure if the chart below includes expenses (MER). I suspect it does, since Morningstar is very good at including the proper elements, but I am not entirely sure. (If anyone has more correct data, please provide it so that I can use that.)

Finally, do note that the returns shown below are not necessarily the same as what a fund investor would have earned. Depending on how much you invest and at what time period, it will impact the actual return.

Sunday, November 20, 2011 2 comments ++[ CLICK TO COMMENT ]++

Why do European companies have higher leverage? Anyone know?

I don't have the answer to the question of the blog post, so does anyone have any idea why European companies tend to have higher leverage than American companies?

I remember noticing this when I briefly looked at US-listed European companies a few years ago. This is just one example and one should be careful with extrapolating off one example but, just compare a company like Diageo (DEO) to Brown Forman (BF/B).

In any case, the leverage issue is starting to pop up in news these days because European banks tend to have higher leverage than American companies. In an opinion piece for Bloomberg, Simon Johnson remarks (bolds by me),

By any measure, Deutsche Bank is a giant. Its assets at the end of September totaled 2.28 trillion euros (according to the bank’s own website), or $3.08 trillion. In the latest ranking from The Banker, which uses 2010 data, Deutsche was the second-largest bank in the world by assets, behind only BNP Paribas SA.

The German bank, however, is thinly capitalized. Its total equity at the end of the third quarter was only 51.9 billion euros, implying a leverage ratio (total assets divided by equity) of almost 44. This is up from the second quarter, when leverage was about 36 (assets were 1.849 trillion euros and capital was 51.678 euros.)

Even by modern standards, this is very high leverage. JPMorgan Chase & Co. has a balance sheet about 20 percent smaller than Deutsche Bank’s, but more than twice as much Tier 1 capital, an important indicator of a bank’s financial strength. Bank of America Corp., whose weakness is a serious worry in the U.S. today, has twice Deutsche’s capital. (These comparisons use The Banker’s ranking of the top 25 banks.)

Globally, Deutsche’s capital ratios are relatively healthy, judging by the banking industry’s standard measures. At the end of the third quarter, its Tier 1 capital ratio was 13.8 percent (up from 12.3 percent at the end of 2010) and its core Tier 1, which excludes hybrid debt that can convert into equity, was 10.1 percent.

How does such a highly leveraged bank become “well-capitalized”? The answer is that “risk-weighted assets” were 337.6 billion euros as of Sept. 30. But what is a low risk-weight asset in the European context today? Incredibly, it is sovereign debt, which of course is far from riskless at the moment.

Perhaps Deutsche Bank holds mostly German government debt, which still has safe-haven value. But it’s likely that Deutsche also holds a significant amount of Italian and French government bonds.

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Opinion: Thoughts on Bill Miller's Exit

Although I don't post much these days, I do follow business/investment news and Bill Miller, CIO at Legg Mason Capital Management, will retire from managing the main value fund. Legg Mason grew from a no-name Boston shop to one of the largest mutual funds, largely due to Bill Miller. He had a strong streak back in the 90's but ended up performing poorly, with near-catastrophic bets on financials, over the last 5 years.

A lot of people don't like Bill Miller—some "value investors" don't consider Miller as a true value investor—but I was, and still am, a fan of him. In addition to Marc Faber, Warren Buffett, Charlie Munger, and David Dreman (at least his book), Bill Miller was one of the key investors who influenced me during my "formative" early years. I suspect what influenced me in the last 5 or so years—good as well as bad habits and knowledge—will probably, permanently, shape my future.

Although I was a fan of Miller, I don't think he is as good as the media made him out to be. In my eyes, he is better than the vast majority of mutual fund and hedge fund managers but he isn't a superinvestor like, say, Martin Whitman. I would put Miller in the same league as Bruce Berkowitz. Miller's record will look pretty bad given how he is going out near the bottom (so to speak) but I think he is a better investor than the record will end up indicating.

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Sunday Spectacle CXLIX

In Defense of Cash

Performance during Severe
Inflation & Deflation

Saturday, November 19, 2011 0 comments ++[ CLICK TO COMMENT ]++

Finally joined Twitter (name Sivaram_V)

(This post is cross-posted on multiple blogs)

I finally decided to leave the cave I was living in ;) and decided to join Twitter. When Twitter first showed up on the scene a few years ago, I thought it was some dumb twittering bird that amounted to nothing more than a fad. Who would have thought that short messages, when long messages have near-zero cost on the Internet, would become popular? It also wasn't clear how Twitter would make money and stay in business as it scaled up. Well, needless to say, I was wrong — very wrong!

I'm still not sure if anyone will bother to follow anything I say. In any case, the main reason I joined was to track others. I notice that more and more content, whether from individuals, bloggers, or online magazines are "announced" on Twitter. It is much easier to follow things on Twitter than it is to visit each website, or use an RSS reader or something. I'm new to smartphones but a service like Twitter is also more efficient and quicker on mobile phones than RSS feeds or some bookmarking service (Twitter doesn't necessarily replace those other options but it does compete when it comes a tracking/filtering/following service).

Right or wrongly, I will be using one account labelled "Sivaram_V" (without quotes) for both my personal thoughts as well as my business/investing views. If you were a professional blogging about your job, you probably shouldn't do this (for instance, if you are a fund manager, you should probably keep separate accounts for your business activities and your personal thoughts). I'm intermingling everything because I probably won't post too often and no one really identifies me with any business. However, this probably means that some of you will find my tweets distracting and way-off-topic. I don't know if Twitter lets you filter tweets automatically but if it does, you may want to only pick up messages containing "#in" or "#li" if you want business/investing views. I'm planning to flag all tweets related to investing, business, economics, and econopolitics with that flag so that only those messages are posted to LinkedIn.

Twitter has a flaw with name lengths in that the full name isn't very long—there isn't enough space for my super-long full name—and common nicknames/handles are already taken. So I'm going with Sivaram_V but don't get this mixed up with SivaramV who is someone else.

Click below to start following me:

Sunday, November 13, 2011 0 comments ++[ CLICK TO COMMENT ]++

Jim Chanos' Presentation from Value Investing Congress

Many of you probably already saw Jim Chanos' presentation from Value Investing Congress in October but I just got around to checking it out. Contrarians should definitely check out the presentation embedded below (Thanks to Jacob Wolinsky for bringing this to my attention.)

I thought I would pick off some key concepts put forth by Jim Chanos. The presentation isn't long but it contains some nuggets so read on if you are interested in my thoughts.

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Sunday Spectacle CXLVIII

Interest Expense and Bond Recoveries
for Distressed Countries

(source: "A ‘haircut’ on Greek bonds? A buzz cut would look smarter," The Globe and Mail. November 11, 2011.)

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Sunday, November 6, 2011 10 comments ++[ CLICK TO COMMENT ]++

Preliminary look at Netflix (NFLX)

Netflix (NFLX) has been in the news lately, and given its steep fall in its stock price, I thought I would take a look at it. This is an early look, focused on its business model.

For those not familiar, Netflix is a US-based distributor of television and film content. It became the dominant DVD-by-mail rental service in the US, and has been transitioning into the online streaming business.

Netflix used to be a "growth story" over the last few years, and favoured by growth and momentum investors. It rose more than 900% within just the last 3 years but has had a spectacular fall this year:

As a contrarian, I became interested given its steep fall. The stock is off given poor results and some strategic mistakes by management.

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Sunday Spectacle CXLVII

Greek Tragedy*? Or is it Comedy?

(source: Kal's Cartoon, The Economist. Nov 5, 2011.)

*GREEK TRAGEDY: Like tragedies in general, a Greek tragedy is a serious play where there are a series of misfortunes. Greek tragedy in particular features masked actors, one storyline set in one location and often many main characters will die at the end of the play...
(source: (partial quote) English Literature Dictionary. ITS Tutorial School.)

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