Video – Michael Mauboussian On Forbes

Intelligent Investing with Steve Forbes presents Michael Mauboussin, chief investment strategist, Legg Mason Capital Management, author of Think Twice

Major take-aways from the interview:

  • 9%, 7.5% and 5.5-6%; the rates of return, respectively, for the S&P500, mutual funds and mutual fund investors, on average– why the discrepancy?
  • Mutual funds underperform the S&P500 on a total return basis due to fees; mutual fund investors underperform the funds mostly due to timing– most individuals buy when funds have done well, sell when they’ve done poorly, exposing themselves to underperformance and missing out on subsequent over-performance
  • Curiously, institutional investors underperform as well; the culprit is overactivity– people believe “if you work hard, you’ll be rewarded”, so institutional investors try to “earn” their returns by moving money around constantly
  • Increasingly, investment returns have to do with luck and not skill; all activities in life fall along a continuum between pure skill and no luck (running competition) to pure luck and no skill (the lottery); the “Paradox of Skill” states that the more skillful competitors are, the more uniform their results become and the more important luck is to explaining differences in results
  • How to accurately judge a manager’s returns? Sample size is important: the more decisions the manager has to make over time, the shorter time horizon can be used to judge them; the fewer decisions they make over time, the longer the time horizon used to judge them
  • Focus on process, not outcome; in investing– analytical process of ideas,¬†behavioral/psychological process, and organizational process (constraints w/in the organization that impede performance)
  • Investing boils down to two activities: handicapping (looking at market assumptions via price and then backing into the scenario that would have to occur for that price to be reasonable, and judging the probability of it¬†occurring) and bet-sizing (waiting until you have a strong advantage and then betting big)
  • Expectations-based investing process: back into the cash flow assumptions that justify current market price; financial/strategic analysis of the company and its industry to see if the company is likely to do better or worse than the market implies; then decide to buy, sell or do nothing– what’s built in? what’s likely to happen? then “over-under” rather than “I know precisely what those cash flows will be”
  • Systems that are entirely skill-based don’t revert to the mean at all; aside from fatigue, running a race 5x will result in the same, highly-skilled winner each time
  • The extent to which a system is not all-skill is the extent to which it can mean-revert, but the question is, what mean? A highly skilled person might come down off a peak but they will not revert to the mean of more normally skilled individuals, for instance (tall parents tend to have tall children, but they might not be as tall as the parents — mean reversion — but you also don’t expect them to go down to the height of the average population)
  • Investing is not all-luck, but it is luck-leaning on the continuum; the best way to judge managers is by process, not performance
  • “Buy cheap and hold”: consider the story of Bob Kirby and the “Coffee Can Approach” [PDF]
  • What can older investors do in today’s interest rate environment? Follow Jim Grant’s advice, “Roll back the calendar 30 years”, ie, nothing, they’re screwed
  • “Patience is the key” to great investment returns

Video – Joel Greenblatt On Forbes

Intelligent Investing with Steve Forbes presents Joel Greenblatt, adjunct faculty member at Columbia University, co-CIO of Formula Investing

Major take-aways from the interview:

  • 70% of active managers can not be passive index funds like the S&P500 due to high costs, high fees
  • Unfortunately, for the 30% who beat the index over the last 3, 5 and 10-year periods, there is no correlation with how they do over the next 3, 5 and 10-yr periods
  • A disadvantage to standard index investments is that they are market-cap weighted; the more overpriced something is, the more of the index it represents, the more underpriced something is, the less of the index it represents
  • A superior alternative is equal-weight indexes, for example, in the S&P500, Stock #1 is allocated the same amount of capital as Stock #500; errors are therefore random rather than systematic
  • Greenblatt’s firm created a “value-weighted index”: the cheaper something is, the more weight it gets in the index
  • Key metrics for analyzing a business
    • High adjusted FCF
    • Returns on tangible assets
  • Why do good companies sell cheaply? People are worried that earnings power over the next few years will not be as good as the past so they’re willing to sell at a discount; institutional investors will systematically avoid uncertainty and provide you opportunity to buy cheap
  • Most business schools are teaching Efficient Markets theory, not Benjamin Graham; good news for value investors because it means you have less competition

Video – Mohnish Pabrai On Forbes

 

Intelligent Investing with Steve Forbes presents Mohnish Pabrai, managing partner, Pabrai Funds

Major take-aways from the interview:

  • Attitude is the most important attribute of any investor
  • The value investor’s attitude advantage is the ability to wait for the right opportunity
  • “All man’s miseries stem from his inability to sit in a room alone and do nothing” channeling Pascal into an investor appropriate format: “All investment managers’ miseries stem from an inability to sit alone in a room and do nothing”
  • Ideal investment industry: gentlemen of leisure who go about their leisurely tasks and when the world is severely fearful is when they put their leisurely tasks aside and go to work
  • People think entrepreneurs take risk; in reality, they do everything they can to minimize risk– low risk, high return bets
  • Pabrai Funds has a “moat” by mirroring Buffett’s 25% performance after 6% hurdle because it aligns his interests with his clients; total fund expenses are 10-15 basis points, with Pabrai’s salary and staff paid for out of performance fees
  • Shorting makes no sense because maximum upside is a double and maximum downside is bankruptcy
  • Do not talk to company management because they are high charisma sales people and will pitch you on optimism, not realism
  • Big fan of the Checklist Manifesto, has a checklist of 80 items he looks over before making an investment
  • Pioneers are the people who get filled with arrows

How Businesses Grow: “The LEGO Story”

I found this video on the Laissez-Faire Books blog after Jeff Tucker posted it recently.

It’s an entertaining and educational video that provides anecdotes about how and why small businesses grow. In the case of LEGO, because they had to– the owner-operator of the company had no golden parachute to fall back on if he failed. This kept him thinking creatively about how to solve the many challenges he and his business faced. It was “find a way” or else he and his children would starve.

It’s a story of entrepreneurialism, the essence of which is experimentation, vision and constant change.

As you watch the video, it’s hard to imagine a story like this being told about anything other than an initially small, local, privately-owned business. It perfectly captures the idea of the “benevolent dictatorship” style of business and capital management. We also get a look at the innovative process that leads to the creation of a whole new industry (or sub-industry, much like the iPhone was an emergent sub-industry within the industry of smartphones).

 

Notes – A Collection Of Chess Openings Video Tutorials

Chess openings

In the game of Chess, “openings” are the initial moves each player makes of their pieces from the starting, or home, positions on the board. Chess has been played for so long and analyzed critically by so many that many of the more common or popular sets of opening sequences have been given names associated with the type of play involved or the individual pro associated with the opening itself.

Gambits

Gambits are openings which involve intentional sacrifices of pieces in order to gain strategic advantage early on in the game’s opening. Below is a list of popular gambit openings:

The Queen’s Gambit

The Danish Gambit

The King’s Gambit

The Latvian Gambit

The Budapest Gambit

The Smith-Morra Gambit

Albin Counter-Gambit

The Benko Gambit

Defenses/Systems

Defenses and systems involve strategic defenses to particular opening patterns, or are opening patterns closely associated with particular professional players or players’ groups. Below are some popular defenses/systems:

The Sicilian Defense

The London System

The Fried Liver Attack

The Vienna Game

The Lolli Attack

The Scandinavian Defense

The Traxler Counter-Attack

The Ruy Lopez

The Semi-Slav

The Grunfeld Defense

The Scots Game

The Nimzo-Indian Defense

The Kings Indian Defense

Good YouTube resources on chess openings:

  1. KebuChess
  2. thechesswebsite
  3. OnlineChessLessons
  4. wwwChesscom

Other chess openings links:

  1. Chess openings explorer
  2. Chess.com Book Openings
  3. Chess.com Study Plan Directory

Exercises In Imagination

A friend sends along the following video: http://www.youtube.com/watch?v=XKfuS6gfxPY

Ignoring the pitch for Ron Paul’s political campaign at the end of it, that’s about as good as a libertarian video comes. The key is the identification of one moral standard for all people. It is hypocritical to expect any other person or persons to appreciate a “foreign policy” that you yourself would not appreciate if applied to you.

Here’s another good video about libertarian philosophy from Stefan Molyneux: http://www.youtube.com/watch?v=Cd-SLRyuRq0&w=560&h=315

The reality of government financing is exploitation of its citizens. The people are not fully and fairly compensated for their labor as the exchange being made (via taxation) is not voluntary and deemed to be mutually beneficial.

I’d like to help produce more videos like these. I think YouTube is a powerful medium for spreading the message of individual liberty through the use of economies of scale.