2010 Berkshire Meeting

http://seshnath.blogspot.com/

Going to Omaha and Pasadena every May had become a fixture in my life for the past few years.  I decided to break with this little tradition starting this year.  Initial thoughts were driven by the difficulty of managing two mostly personal trips to the other side of the world in a gap of one month (the second for other unavoidable reasons).  Then, came the news that Berkshire was splitting the B shares and the final nail in the coffin was that the canceled international shareholders meet and greet.  The last one is where people from outside North America got to meet the man himself.  Besides, over the years the quality of the crowd has been deteriorating, that is, in their seriousness towards Berkshire business.  Now, it has ceased to be less of a convention and more of a vacation spot.

My decision cannot be equated with a full blown-out divorce, it is more like a couple deciding that they need to spend time apart.  And, the big significant difference is this relationship is one sided commitment from my side.

Twitter and live coverage by Omaha World Herald andMorningstar made up for the physical distance.  Other bloggers have done an excellent job of note taking and posting them.  I am posting some links at the end here.

First some excerpts from the annual report for 2009 and the letter to shareholders:-
 
Dividends
Following a question in 2009 meeting, he added an explanation to the Principle 9 of the Owner's Manual.  (For the uninitiated, Berkshire codified its Owner-related principles in 1996 and it addresses the agency problems inherent in a corporate form of organisation where the manager's interests and the owner-shareholder's interests are not aligned.  It is a must read for any management/finance professional).

"We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely.
I should have written the “five-year rolling basis” sentence differently, an error I didn’t realize until I received a question about this subject at the 2009 annual meeting.
When the stock market has declined sharply over a five-year stretch, our market-price premium to book value has sometimes shrunk. And when that happens, we fail the test as I improperly formulated it. In fact, we fell far short as early as 1971-75, well before I wrote this principle in 1983.
The five-year test should be: (1) during the period did our book-value gain exceed the performance of the S&P; and (2) did our stock consistently sell at a premium to book, meaning that every $1 of retained earnings was always worth more than $1? If these tests are met, retaining earnings has made sense."

Earlier it said:
"We continue to pass the test, but the challenges of doing so have grown more difficult. If we reach the point that we can’t create extra value by retaining earnings, we will pay them out and let our shareholders deploy the funds."  And, the question last year was, since you failed this test, will you pay a dividend?

From this year's meeting - "Buffett is asked about whether Berskshire would issue a dividend. Buffett says every dollar left in the business has produced something over a $1.30. Buffett says Berkshire has met the test of finding profitability. Berkshire has made every $1 of retained earnings make more than $1. Buffett says if the company does that over time, it will continue to retain earnings. "

Investment Strategy

"In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite willing to enter businesses that regularly require large capital expenditures. We expect only that these businesses have reasonable expectations of earning decent returns on the incremental sums they invest. If our expectations are met – and we believe that they will be – Berkshire’s ever-growing collection of good to great businesses should produce above-average, though certainly not spectacular, returns in the decades ahead."

Tweets:-
when premiums are wrong, go play golf. (too many ppl confuse action w progress/value)
Buffett: events around world of last few years makes me more bearish on all currencies than before
We have always had the same potential, it's our perception of what is possible that changes.
Buffett: lending money (buying bonds) boils down to "are they going to broke or not", equity q is much more complicated
Buffett: I knew enough to lend them money, but didn't have enough info to buy the equity [in Harley]
LOL! Buffett: I kinda like a business where guys tattoo your name on their chest [re: Harley]
"If you wanted to bet on higher or lower inflation, you'd want to vote on higher. Maybe a lot higher."
Buffett: your money can be inflated away, but your talent can't be inflated away--regardless of the currency
Buffett: if inflation gets going, it will be hard to stop; trend is not destiny, we have power to control our future
"Talent is the perfect asset to deal with any monetary condition (inflation/deflation). Charlie and I will have to rely on money."
When it comes to managing money, Charlie Munger just said: "Take the high road. It's far less crowded."
"I think we're in for a long period for where the ordinary result is not going to be very exciting." -- Munger.
Charlie: equities are the best of a bad lot of available opportunities. In for a long period where ordinary result not exciting
Charlie: fundamental theory is pragmatism because it suits our natures and because it seems to work better
"It's not about how big your circle of competence is but rather on knowing where the perimeter is" -Buffett
Buffett says the pressure of extraordinarily low interest rates on asset prices is hard to overestimate
Buffet on 0.10% interest rates: If you invested at 0.10% when Columbus landed...you would have almost doubled your money by now!
Speculators do no harm if they are bubbles on a steady stream of enterprise - WB quoting Keynes
...but it will be ill-done if enterprise becomes a bubble on a whirlpool of speculation - Buffett quoting Keynes
Munger says stats on gov't debt are misleading because only includes bonds outstanding and not unfunded obligations
"if you want to give away all of your money to charity, it's a great tax dodge." - Warren Buffet
Munger: If BRK would create make-work jobs to increase human hope, the effect over time would be to reduce human hope
"If you believe in creative destruction...as we do in this country..you better also have a social safety net" -Buffett
Munger: The politicians are not behaving better now that the newspapers are weakening. We're going to miss the newspapers.
Munger: It can be hard in India because of gov't regulations. This could lead to faster growth in other emerging markets like China 

On buying a rail road:-

"Our BNSF operation, it should be noted, has certain important economic characteristics that resemble those of our electric utilities. In both cases we provide fundamental services that are, and will remain, essential to the economic well-being of our customers, the communities we serve, and indeed the nation. Both will require heavy investment that greatly exceeds depreciation allowances for decades to come. Both must also plan far ahead to satisfy demand that is expected to outstrip the needs of the past. Finally, both require wise regulators who will provide certainty about allowable returns so that we can confidently make the huge investments required to maintain, replace and expand the plant.
We see a “social compact” existing between the public and our railroad business, just as is the case with our utilities. If either side shirks its obligations, both sides will inevitably suffer. Therefore, both parties to the compact should – and we believe will – understand the benefit of behaving in a way that encourages good behavior by the other. It is inconceivable that our country will realize anything close to its full economic potential without its possessing first-class electricity and railroad systems. We will do our part to see that they exist.
In the future, BNSF results will be included in this “regulated utility” section. Aside from the two businesses having similar underlying economic characteristics, both are logical users of substantial amounts of debt that is not guaranteed by Berkshire. Both will retain most of their earnings. Both will earn and invest large sums in good times or bad, though the railroad will display the greater cyclicality. Overall, we expect this regulated sector to deliver significantly increased earnings over time, albeit at the cost of our investing many tens – yes, tens – of billions of dollars of incremental equity capital."
 
Managing and Evaluating Managerial Performance

Buffett clarifies Berkshire's measurement metrics for evaluating managerial performance.  "From the start, Charlie and I have believed in having a rational and unbending standard for measuring what we have – or have not – accomplished. That keeps us from the temptation of seeing where the arrow of performance lands and then painting the bull’s eye around it."
Then he guides you through the maze of seemingly complex thought process to arrive at a simple solution that is typical of Buffett.  S&P 500 is the benchmark; Berkshire's share price can be influenced by market forces that are beyond the control of the management; intrinsic value of Berkshire is hard to calculate; so we use book value though it understates.  Then he goes to show you what if they had calculated performance using market value.  And the conclusion, "..our defense has been better than our offense, and that’s likely to continue." and that "our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue." and promises better-than-average results due to the outstanding businesses and truly great managers.

Reiterating the managerial excellence is a little movie that is played with music to "My Favorite Things" from The Sound of Music.  And comments like "If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit." (talking about Ajit Jain of National Indemnity)

From the meeting (courtesy Omaha World Herald's Joe Ruff)- "Buffett is asked about compensation of its managers. Buffett says Berkshire never uses a compensation consultation. Buffett says it is hard to determine one standard for Berkshire's diverse companies. Buffett says some businesses are easier to manage than others, some use more capital expenses than others. Buffett says he tries to figure out how best to pay people based on the economic characteristics of their industries. Buffett says it does not take that much time and it is not rocket science. But he says it does take some understanding of the characteristics of the different companies. And he says it requires some interaction with the managers, with them and Buffett sharing ideas about what they really are contributing to the company. Buffett says Berkshire pays some big money, with manager making 10s of millions annually. And we have managers if we suffer they suffer. But Buffett says everyone wants to be treated fairly. Buffett says the important thing is to have the salaries reached understood by the managers. Buffett says managers really need to widen their moats compared with other companies in their industries. Munger says it is amazing how simple it has been, how little time it has taken and how well it has worked."

"Buffett is asked about having managers who misbehave ethically or legally. Would Berkshire intervene then? Buffett says yes, sure. Buffett says he wants to hear about problems. Buffett says there is an internal function in Berkshire that anything that comes in relating to alleged bad behavior it will be investigated by Berkshire. Everyone once in awhile there have been important transgressions that have come to me. We encourage that. Buffett says a letter goes out every two years, a page and half long. Buffett says in the letter it talks about having more money than it needs, but reputation is important. Buffett says a new line says if reason you are doing something because the next guy is doing it, that is not good enough. Buffett says there has to be a reason better than that. Buffett says Berkshire will have more trouble than it has in the past because it is so much bigger than it used to be. But Buffett says he and Munger want to hear about it fast if there is trouble."

Tweets:-
Buffett on compensation: It's not rocket science but requires an interaction w/ managers: what do they actually add 2 the company?
Buffett: what I pay managers for is to widen the moat
Buffett on compensation: You still have to treat people fair, even if they don't need the money. 
"Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless."
"When something is found or alleged: Get it right, get it fast, get it out, get it over. But get it right is number one".WB
There are many CEOs in america I would like to see gone and Loyd Blankfein is not one of them, says Charlie
 
All I want to know is where I’m going to die, so I’ll never go there

I would love to see another annual report with the following appropriate counsel on avoiding trouble - "Long ago, Charlie laid out his strongest ambition: “All I want to know is where I’m going to die, so I’ll never go there.” That bit of wisdom was inspired by Jacobi, the great Prussian mathematician, who counseled “Invert, always invert” as an aid to solving difficult problems. (I can report as well that this inversion approach works on a less lofty level: Sing a country song in reverse, and you will quickly recover your car, house and wife.)" 

What won't Berkshire do?
- avoid businesses whose future they cannot evaluate;
- never be dependent on the kindness of strangers;
- subsidiaries operate on their own - "would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly – or not at all – because of a stifling bureaucracy."...."Charlie and I will limit ourselves to allocating capital, controlling enterprise risk, choosing managers and setting their compensation."
- make no attempt to woo Wall Street. "want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur."

Tweets:- 
""Success is avoiding stupidity" Charlie Munger ;) "
"You give human beings the flexibility to do absolutely anything they damn well please, they will go plum crazy" - CM 
"You want to create a structure that minimizes the weaknesses of human behavior" -Buffett

Taking responsibility:

"Last year your chairman closed the book on a very expensive business fiasco entirely of his own making." and goes on to talk about the credit cards to GEICO customers (I was one of them, who closed the card when they decided to charge the fees.)
"GEICO’s managers, it should be emphasized, were never enthusiastic about my idea. They warned me that instead of getting the cream of GEICO’s customers we would get the – – – – – well, let’s call it the non-cream. I subtly indicated that I was older and wiser.
I was just older."

"The major problem for Berkshire last year was NetJets, an aviation operation that offers fractional ownership of jets. Over the years, it has been enormously successful in establishing itself as the premier company in its industry, with the value of its fleet far exceeding that of its three major competitors combined. Overall, our dominance in the field remains unchallenged."
"NetJets’ business operation, however, has been another story. In the eleven years that we have owned the company, it has recorded an aggregate pre-tax loss of $157 million.  It’s clear that I failed you in letting NetJets descend into this condition. But, luckily, I have been bailed out.  Dave Sokol, the enormously talented builder and operator of MidAmerican Energy, became CEO of NetJets in August. His leadership has been transforming"
"Most important, none of the changes wrought by Dave have in any way undercut the top-of-the-line standards for safety and service that Rich Santulli, NetJets’ previous CEO and the father of the fractionalownership industry, insisted upon. Dave and I have the strongest possible personal interest in maintaining these standards because we and our families use NetJets for almost all of our flying, as do many of our directors and managers. None of us are assigned special planes nor crews. We receive exactly the same treatment as any other owner, meaning we pay the same prices as everyone else does when we are using our personal contracts. In short, we eat our own cooking. In the aviation business, no other testimonial means more."

"It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault.  It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer."

"In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.  It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.  The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well."

On derivative contracts:-

- Though it’s no sure thing, I expect our contracts in aggregate to deliver us a profit over their lifetime.
- Only a handful of our contracts require us to post collateral under any circumstances.
- you should expect large swings in the carrying value of these contracts. "..these wild swings neither cheer nor bother Charlie and me"
"To date we have significantly profited from the float they provide. We expect also to earn
further investment income over the life of our contracts."
"The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At Berkshire nothing like that has occurred – nor will it.  
"Buffett is asked what useful function do derivatives serve? The questioner says we have done well without them for years. Buffett turns the question to Munger. Munger says derivatives on things like grain or other commodities are fine, but if all other derivatives vanished he would be fine with that. Buffett quotes John Maynard Keynes as saying speculators do no harm if they are bubbles on a steady stream of enterprise. But it will be ill-done if enterprise becomes a bubble on a whirlpool of speculation. Munger says if a small group with a lot of money and influence are very interested in something, they will win out. He says that is just the way it is." 

Tweets:-
Warren: different prices for collateralized vs uncollateralized derivative contracts akin to renting furnished or unfurnished apt.
Munger: If all derivatives vanished, the world would be a better place
Issuing Shares for shares
 
"Our subsidiaries made a few small “bolt-on” acquisitions last year for cash, but our blockbuster deal with BNSF required us to issue about 95,000 Berkshire shares that amounted to 6.1% of those previously outstanding. Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy.  
The reason for our distaste is simple. If we wouldn’t dream of selling Berkshire in its entirety at the current market price, why in the world should we “sell” a significant part of the company at that same inadequate price by issuing our stock in a merger?
In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.
Imagine, if you will, Company A and Company B, of equal size and both with businesses intrinsically worth $100 per share. Both of their stocks, however, sell for $80 per share. The CEO of A, long on confidence and short on smarts, offers 11⁄4 shares of A for each share of B, correctly telling his directors that B is worth $100 per share. He will neglect to explain, though, that what he is giving will cost his shareholders $125 in intrinsic value. If the directors are mathematically challenged as well, and a deal is therefore completed, the shareholders of B will end up owning 55.6% of A & B’s combined assets and A’s shareholders will own 44.4%. Not everyone at A, it should be noted, is a loser from this nonsensical transaction. Its CEO now runs a company twice as large as his original domain, in a world where size tends to correlate with both prestige and compensation.
If an acquirer’s stock is overvalued, it’s a different story: Using it as a currency works to the acquirer’s advantage. That’s why bubbles in various areas of the stock market have invariably led to serial issuances of stock by sly promoters. Going by the market value of their stock, they can afford to overpay because they are, in effect, using counterfeit money. Periodically, many air-for-assets acquisitions have taken place, the late 1960s having been a particularly obscene period for such chicanery. Indeed, certain large companies were built in this way. (No one involved, of course, ever publicly acknowledges the reality of what is going on, though there is plenty of private snickering.)  
In our BNSF acquisition, the selling shareholders quite properly evaluated our offer at $100 per share.  The cost to us, however, was somewhat higher since 40% of the $100 was delivered in our shares, which Charlie and I believed to be worth more than their market value. Fortunately, we had long owned a substantial amount of BNSF stock that we purchased in the market for cash. All told, therefore, only about 30% of our cost overall was paid with Berkshire shares.
In the end, Charlie and I decided that the disadvantage of paying 30% of the price through stock was offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and liked for the long term. It has the additional virtue of being run by Matt Rose, whom we trust and admire. We also like the prospect of investing additional billions over the years at reasonable rates of return. But the final decision was a close one. If we had needed to use more stock to make the acquisition, it would in fact have made no sense. We would have then been giving up more than we were getting.

I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is worth far more than its market price. In more than fifty years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given. When a deal involved the issuance of the acquirer’s stock, they simply used market value to measure the cost. They did this even though they would have argued that the acquirer’s stock price was woefully inadequate – absolutely no indicator of its real value – had a takeover bid for the acquirer instead been the subject up for discussion.
When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”

"our fellows caved in and agreed to this value-destroying deal. “We need to show that we are in the hunt. Besides, it’s only a small deal,” they said, as if only major harm to shareholders would have been a legitimate reason for holding back. Charlie’s reaction at the time: “Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?”

Media over-exposure
Tweet : "buffett is appearing in Wall Street 2 w/ michael Douglas? Who knew?"
From the meeting "Buffett is asked if his increased media exposure is good for Berkshire shareholders. Buffett says probably not. Buffett says he has seen over the years the development of broadcast television over print. He says if you want a record of what you actually said, instead of a reporter's and editors' interpretations, it is great to have the broadcast version. I like the idea, whether it is charlie rose or CNBC, a record of my own words, instead of someone's interpretation of it."

Ethics:-
Charlie: Every business should decline a lot of business that it doesn't. Just because it's legal, doesn't make it right
"The ideal is that we celebrate wealth only when it has been fairly won and wisely used." -Charlie Munger
Charlie: we get offered things that people won't sell to anyone else. We have our own ethics-based screening device
WB if reason you are doing something because the next guy is doing it, that is not good enough
 
Learning:-
"The old men (Warren & Charlie) always continue to learn which is essential!" -Charlie Munger
If you keep asking questions at a young age like that, gradually you learn. Love when Munger ruminates on his childhood.
Charlie: if you're scared to do something, maybe you should get your feet wet with a little more failure.
Charlie: go to bed each night a little wiser than you were when you got up. People who do that almost never utterly fail 



Buffett says in a country where the undisciplined are unpunished it brings people to wonder why they should behave properly
"When you picked your wife, you picked the best who would take you. We should live the rest of our lives like that." Charlie Munger

I am a twit @seshnath 

Links to Notes:-
http://inoculatedinvestor.blogspot.com/2010/05/2010-berkshire-hathaway-annual-meeting.html
http://www.scribd.com/doc/30895400/Annual-Meeting-2010-Final-2-0

Fast Money's Trader Icons

http://www.cnbc.com/id/37510862?slide=1

Fast Money's Trader Icons


Who doesn't dream of greatness - swinging like Babe Ruth or punching like Muhammad Ali? But those guys are sports stars.
If you're like us, your heroes are the legendary all-star investors, the heavy hitters who knocked the cover off the ball time and again with their winning trades.
Following are the Fast Money icons - some of the greatest traders of all time.

By Lee Brodie

Posted 8 June 2010

Jesse Livermore


Position: Trader

Claim To Fame: Shorted Crash of 1929



Nicknamed "Boy Plunger" Jesse Livermore is among the very few investors who profited handsomely from both the Panic of 1907 and the Great Crash of 1929 largely due to short positions that generated as much as $100 million.

His philosophy of trading is still widely citied, 'increase the size of your position if they're moving in your favor and cut losses quickly.' Livermore died in 1940 at the age of 67.

George Soros


Position: Chairman, Soros Fund Management

Claim To Fame: Made $1 billion from UK Currency Crisis

Born Aug 12, 1930 in Budapest, Soros grew up in the shadows of Nazi Germany. He didn’t make a splash as a trader, however, until 1992 when he made $1 billion in a single day by betting against the British pound.

Sometimes called, "The Man Who Broke The Bank Of England" Soros currently runs a hedge fund and funds philanthropic causes.

Paul Tudor Jones


Position: President & Founder, Tudor Investment Corporation

Claim To Fame: Predicted 1987 Black Monday

A one time broker for EF Hutton, Paul Tudor Jones is known for predicting the 1987 stock market crash and doubling his clients’ money in the process. As of 2009 he was worth an estimated $6.3 billion.

Jones also founded the Robin Hood Foundation, a charity committed to the fight against poverty in New York City.

James "Jim" Simons


Position: Founder, Renaissance Technologies

Claim To Fame: Founding Father of Quant Trading

A former mathematician, code-breaker and poker player, Renaissance Technologies founder Jim Simons is a pioneer of quantitative trading. He was among the very first to harness complex mathematical models to analyze and execute trades.

His hedge fund has returned more than 30 percent annually for the last 20 years. In January 2010 Simons retired from his firm and became President of Euclidean Capital.

Nicolas Darvas


Postion: Self Taught Investor

Claim to Fame: Developed BOX Theory of Stock Picking

A self taught investor and famous dancer (he toured with Judy Garland and Bob Hope), Darvas made a name for himself on Wall Street in the late 1950’s by implementing a series of trades that transformed $10,000 into $2 million over a period of only 18 months.

He attributed his profits to something called BOX theory, a mix of technical and fundamental analysis that’s still widely used today.

John Paulson


Position: President, Paulson & Co.

Claim To Fame: Shorted Housing Ahead Of The Real Estate Bubble

Considered to have executed “The Greatest Trade Ever” Paulson made financial history in 2006 as one of the very few investors who recognized the housing market was headed for a major fall.

By betting against risky mortgages and precarious financial firms he earned more than $15 billion. This year, his name surfaced in the SEC's civil fraud suit against Goldman Sachs, although his firm was not accused of any wrongdoing.

Steve A. Cohen


Position: Founder, SAC Capital Partners

Claim To Fame: Knack For Spotting Opportunity

Called “the most powerful trader on Wall Street,” by BusinessWeek, Cohen is also among the most reclusive. He’s famous for having an uncanny ability to make money regardless of market conditions.

According to published reports his first day on the job at Gruntal & Co., he made an $8,000 profit. As of 2009 he was worth $11.4 billion.

Ken Griffin


Position: Managing Director & CEO, Citadel Investment Group

Claim To Fame: Launched On Of The World's Largest Hedge Funds

Said to have had a penchant for investing since college, Ken Griffin began his trading career by launching two funds from his Harvard dorm room.

As the head of Citadel, one of the largest hedge funds in the world, he currently manages about $13 billion. On any given day his firm generates as much as 3% of the trading volume in New York.

Jim Rogers


Position: Co-Founder, Quantum Fund

Claim To Fame: Spotted Bull Market In Hard Assets

Co-founder of the legendary Quantum Fund with George Soros, Rogers is celebrated for his prowess in trading commodities; an ability that helped the Quantum Fund return 4200% in its first 10 years.

Author of Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market Rogers may have started his love affair with ‘real things’ as a boy, selling peanuts at baseball games.

John D. Arnold


Position: Founder, Centaurus Advisiors

Claim To Fame: Among World’s Best Energy Traders

With a net worth of $2.7 billion, the 30-something Arnold is said to be among the youngest billionaires in America. His prowess for energy trading generated $750 million for Enron in 2001.

But he’s best known for taking the other side of Amaranth Advisors' bad natural gas bet; he reportedly made as much as $2 billion personally from his winning short position.

Ray Dalio


Position: Founder, Bridgewater Associates Holdings

Claim To Fame: ‘Fundamental Principles’ Needed For Financial Success

With approximately $43 billion in assets in 2009, Ray Dalio runs Bridgewater Associates, the second largest hedge fund in the world. Students of business often study his ‘fundamental principles’ a kind of philosophy which Dalio says is the foundation for his great success.

The entire list is available to the public free of charge on Bridgewater's website . (Dalio declined to give us a photo.)

The Start of the Exciting Life 惊涛拍岸直挂云帆

       Still motivated by the wonderful experience at London Business School, I started a more exicting life back in Hong Kong.  This the one of the most important turning points of my life.  I know I might experience barriers and challenges, but I am sure I will ride a passionate journey that leads to success.

      Two big things happened last week.  I stopped working with Artis Capital and the internal war of Gome.  The work experience at Artis helped reexamine the true meaning of value investing and pushed me to go deeper into valuation and investment decision making.  From now on, I will build a solid model for each company I am investing and make very thorough and structured valuation.  The war at Gome helped me think about how to build a business empire and how to manage it.  This event is a great catestrophe investment chance, and I will study the business and the value behind the business.  I will also forecast the prospects of the business. 

http://www.gurufocus.com/news.php?id=54052

May. 01, 2009
 
Ben Graham’s net-net strategy worked well for him, would it still work today? GuruFocus users created a number of net-net portfolios. The net-net portfolios created 5 months ago have gained more than 50% in this rocky market. Thank you, Ben!
In his book “The Intelligent Investor”, Ben Graham, the father of value investing, found that one strategy that worked well for him was to buy companies that are sold at below its net current asset value. He called those bargains.

He wrote:

“The idea here was to acquire as many issues as possible at a cost for each of less than their book value in terms of net-cirrent-assets alone – i.e., giving no value to the plant account and other assets. Our purchases were made typically at two-thirds or less of such stripped-down asset value. In most years we carried a wide diversification here – at least 100 different issues.”

Modern value investors rarely have had the opportunities to invest in these “bargains”, until very recently, the market is at its lowest valuation in decades. Inspired by our users, GuruFocus developed a “Graham Net Current Asset Value Screener”, to find these companies:

The stock prices are less than the net current asset value of the companies – Benjamin Graham

During the past 12 months, the companies generated positive operating cashflow.

The company has no meaningful debt compared to its cash position.

As requested by users, now you can also see the companies had negative operating cashflow over the past 12 months.

GuruFocus users have created portfolios based on of Ben Graham Net Current Asset Value Screener. How have these portfolios performed? Does Ben Graham strategy still work? This is a review of the recent performances of Ben Graham Net Current Asset Value Bargains.

In order to test this screener, GuruFocus created a net-net portfolio on Nov. 24, 2008 with the top Ben Graham bargains . Since then the market recovered a bit, S&P500 grew from 851 to its Thursday close of 872, or 1%. Small caps, which most of these bargains are, did similar. The Russell Micro Cap index grew 1.07%. How did the Ben Graham bargains do?

This is the list of Ben Graham bargain portfolio GuruFocus created on Nov. 24, 2008.

Symbol      Buy Price ($)     Close PRICE        Gain/Loss

ACTS        1.43                  1.74                      21.68%

ATV          1.29                  3.24                      151.16%

AVNX*     0.87                 3.06                       252%

DRAM      1.2                    1.32                       10%

GSIG        1                        1.13                       13%

LTON       0.73                  1.46                        100%

MTSN      1.32                  1.15                         -12.88%

NCST       0.63                  0.3899                     -38.11%

RACK      3.87                  4.56                         17.83%

SOAP       2.15                  3.7                           72.09%

TSPT        5.45                  2.9                            -46.79%

VPF          1.4                    1.28                          -8.57%

VVTV       0.51                  0.72                          41.18%

*Acquired at $3.06/share.

This portfolio generated an astonishing gain of about 51% in about 5 months. One of the companies, Avanex was acquired at $3.06 a share. When we added it into the list, it was sold at 87c a share, far below its cash value even as the company generates positive cash flow. None of the companies in the list went bankrupt or delisted.

In the meantime, a few other users also generated their portfolios using Benjamin Graham Net Current Asset Value Screener. The summary of the performances is below:

User Portfolio Created on Net-Net Portfolio Gain S&P500 Russell Microcap Link

taurusco12/18/2008 14.5% -5.19% -4.45% Go to Portfolio

gurufocus 12/25/2008 25.7% -1.49% -0.64% Go to Portfolio

cavallino20012/27/2008 19% -0.87% -1.69% Go to Portfolio

anthonyvigneron1/1/2009 43% -5.05% -7% Go to Portfolio

All these portfolios delivered great returns even as the market declined. The investment strategy Ben Graham found more than half a century ago finds its opportunities again today!

Please remember, as written by Ben Graham, you need to buy a basket of these stocks to reduce risk, as some of the company may go under as situations worsen. Also does buy & hold work for this portfolio? Maybe not.

If you like to see the current list of Ben Graham bargains, go to: Benjamin Graham Net Current Asset Value Screener. This is for Premium Members only. If you are not a Premium Member, you are invited to Take a 7-day Free Trial of GuruFocus Premium Membership.

Gold – a hedge against uncertainty --- Why gold prices can continue to rise despite increasing supply and falling interest rates.

http://www.financeasia.com/News/221116,gold-8211-a-hedge-against-uncertainty.aspx?refresh=on

By Jonathan Spall, Barclays Capital

28 July 2010

Keywords: gold
investment
inflation
commodities
barclays capital
 
Analysis of a commodity is a reasonably straightforward matter. Production is reviewed to see what changes have taken place, similarly with consumption. An adjustment is then made for global economic conditions and whether there is likely to be a shortfall/surplus in demand or supply compared with previous years. On that basis a forecast is delivered. A currency differs in that interest rates are taken into account and consideration of governmental policy is thrown into the mix. This is clearly a gross simplification of the process otherwise we could expect all estimates to be 100% correct -- something that is rarely, if ever, achieved.




However, what do you do about a product that is a hybrid of the two? Where some investors focus on its commodity aspects and others on its currency features. That is the problem with gold. Roughly some 2,450 tonnes of the metal is produced each year but since gold is not destroyed in the "consumption" process all that really happens is that the stocks of the metal are being added to each year.



A generally accepted estimate is that there are now some 165,000 tonnes of gold that have been mined in the history of the world. Some of that is in museums, some held as "sentimental" jewellery that will never be sold, 30,000 tonnes still sits with central banks but much of it is being hoarded in bars, coins and "investment" jewellery. So if supply and demand are the key determinants then it is obvious that gold should simply fall each and every year as global stocks increase.



Similarly, a key driver of currencies is often cited as interest rates: the greater the yield, the more attractive that currency becomes to investors and hence its exchange rate will tend to rise. So what about a "currency" that has no yield for the majority of investors? True it can become attractive if nothing else produces a return but that simply puts it in a category along with everything else -- indistinguishable from the general morass.



What then of an investment that has increased five-fold in value over the past 10 years despite global stocks increasing from 140,000 tonnes to 165,000 tonnes and where six month interest rates have collapsed from 2% to 2 basis points over the same period? Clearly neither the currency nor the commodity component are in the ascendency yet equally obviously a major change has taken place to account for this seemingly nonsensical contradiction.



While there are a number of theories looking to account for this, my view is altogether more straightforward and encapsulated in the accompanying chart which I have dubbed the "trust gap".





For a larger view of the chart, please click on the image.





In this chart, both gold and the US consumer price index (CPI) have been indexed to 100 and set back to 1975. The notion being to see the relative performance of gold against what is often trumpeted as one of its main attributes: that of a hedge against inflation. As can be seen in the late 1970s and early 1980s gold moved ahead of inflation. This was a period when the world had been subjected to a series of oil price shocks, inflation was viewed as rampant and out of control, the US government was headed by President Jimmy Carter and the populace was faced with watching its citizens being held hostage in Iran.



As we moved through the 1980s inflation was seen as tamed by figures such as Paul Volcker and Alan Greenspan in the Federal Reserve and Karl Otto Poehl and Hans Tietmeyer in Germany's Bundesbank. Equally important was the notion of a strong government in these countries. Put succinctly there was trust in the ability of government and its agencies to deliver stable growth and low inflation -- the so-called "goldilocks" economy. Understandably, who needed an asset that protected against inflation, was no-one else's obligation and seen as a store of value?



However, as the dot com boom gave way to the dot com bust, as the housing bubble exploded and the credit crunch took hold, gold began to move up towards the inflationary trend before finally breaking through it on the woes of the global financial system. The picture being that gold is as far above inflation now as it was below it in the late 1990s when European central banks were selling the metal. Notably the selling has dried up as the gold price has soared and instead we have seen nations like China, Russia, India and Saudi Arabia all buy metal.



So what has changed? To me an investment that is trumpeted as being outside the financial system is irrelevant when there is trust in that system. Remove that, and in a period of uncertainty and financial stress this notion of being separate is key. So, as the world focused on expansionary monetary policies and quantitative easing (printing money) the fear was of inflation. However, with the idea starting to take hold that the world is no longer facing the threat of rapidly rising prices but of deflation, does this then negate the argument?



Gold is not a shopping list of attributes, but it has in fact one very simple attribute -- it is a hedge against financial uncertainty and dislocation. While investors remain unsure of the future and of the ability of their governments and monetary authorities to return to a time of steady growth and prices, then the attractions of gold will remain. Consequently it will continue to appeal to a widening group of investors and as such, its appeal, and price, can rise even while stocks of the metal continue to increase.



Jonathan Spall is a London-based director of commodities at Barclays Capital and the author of "Investing in Gold", which was published in 2008 by McGraw Hill.



© Haymarket Media Limited. All rights reserved.

Notes from Berkshire Hathaway Annual Shareholder Meeting

http://www.huffingtonpost.com/alan-schram/notes-from-berkshire-hath_b_559941.html

Close to 40,000 enthusiastic shareholders made the pilgrimage to Omaha this year, coming from all over the world to attend "Woodstock for capitalists".

Following are the highlights of comments made by Warren Buffett and his vice chairman Charlie Munger, covering a broad range of issues, and picking a sample from over 1,500 questions submitted to them, in a Q&A session that lasted eight hours.

The first issue to come up was the highly publicized $5 billion investment Berkshire made in Goldman Sachs. Berkshire bought its preferred stock in Goldman at the height of the crisis. That investment pays Berkshire an interest of $15 every second. So while the allegations made against Goldman harm the investment bank's reputation and employees' morale, Buffett loves the investment. He also mentioned Goldman has assisted Berkshire in building its business, starting in 1967 when they helped sell Berkshire's first bonds issuance.

Buffett gave a detailed explanation of the nature of the much discussed ABACUS transaction, for which Goldman has been sued by the SEC.

The customer was a large bank, ABN Amro, now part of RBS. They guaranteed the credit of ACA, which insured the bonds covered by said instrument, and consequently suffered a large loss. Berkshire itself often engages in similar transactions, and collects a fee for guaranteeing similar credit. Berkshire evaluates bonds and prices them, exactly as ACA did.

In this case, ABN Amro was paid $1.6 million to bear the risk on $900 million worth of bonds, which turned out to be worthless.

Buffett believes many municipal bonds insurers expanded into new business such as structured credits when the margins on their traditional muni bonds business narrowed. But they were much less familiar with the new complicated securities, with unsurprising dreadful results.

Buffett has little sympathy for the bank making dumb credit decisions. ACA has no reason to complain and no one else to blame for a bad business decision they made. Buffett does not think Goldman Sachs is responsible for the losses that ensued. Responding to a shareholder question, Buffett sees no reason to replace Goldman Sachs CEO Lloyd Blankfein. He believes the Wells notices Goldman received were not material enough and therefore did not have to be disclosed.

Outlook on US economy. Buffett and Munger were very optimistic about America's future. Berkshire sees plenty of opportunities in the US and sees no reason to shift the center of its investments to other countries.

The deficit reduction commission recently appointed by the President (former Senator Alan Simpson and erstwhile WH Chief of Staff Erskine Bowles) has few choices but to raise taxes and cut expenses. While deficit spending is not going to work for extended periods of time, the US is not at risk of defaulting because its currency is still the world's reserve currency.

Moreover, the country can handle unfunded liabilities as long as it experiences GDP growth.

Given that capitalism constantly looks for ways of doing things better and with less people, we need a social safety net. Society owes a minimum standard of living to people who are temporarily out of work.

Inflation. Risk of Inflation has significantly increased because of the policies we are pursuing, and that does not bode well for either cash or fixed income. However, Buffett notes the dollar devalued by about 95 percent since he was born, and the country still did fine. He also notes the stimulating response to the financial crisis may have been necessary, but weaning the country off the medicine of massive debt may be harder than the ailment itself.

They are generally bearish on all currencies, and believe equities are likely to give you a positive real return, and are superior to the unenticing alternatives (such as bonds and cash).

Financial Reform. Buffett and Munger believe the financial system has too much complexity and would like to see reform enacted much along the lines proposed by Paul Volcker. They believe too much in the financial world is counter-productive, and a reformed system should drastically limit what investment and commercial banks are allowed to do.

Derivatives. The usefulness of derivatives is overrated. They have some utility but have to be conducted safely, under responsible rules. Wall Street should have a socially important purpose, and not resemble a casino, where people are more concerned with valuing an option than valuing a business.

Congress is looking into imposing new retroactive regulation on derivatives (Berkshire has 250 derivative contracts, down from some 23,000 contracts ten years ago, with a notional value of 1 percent of that of some other large institutions).

Even if the bill passes, it would not impact Berkshire. Only in the unlikely event that Berkshire is found to be a threat to the system, the company would have to retroactively post collateral on contracts, which would require it to tie up capital. Inserting collateral requirements retroactively would be constitutionally dubious as it violates the sanctity of contracts, and would neither be fair nor smart, but the company can easily handle such requirement.

Succession. Always a hot issue with Berkshire shareholders, the question usually comes up. The potential successors to the position of Chief Investment Officer did well in 2009 (one of them returned 200 percent), after a difficult 2008. The list of four possible replacements has changed over the past year, which is unusual news.

Buffett and Munger believe the culture of Berkshire is self reinforcing, and will outlast the life of the founders. Berkshire is run so it can withstand any systemic shock. With over $60 billion in insurance float, Berkshire is the world's premier insurance company.

Oil. Buffett and Munger believe we will not be dependent on oil forever. The discovery of oil in the 1850's changed the world and enabled major growth. Within 150 years, humans exploited what took hundreds of millions of years for nature to create. That added tremendous value. But human ability to innovate should not be underestimated. With our emerging technologies, civilization is likely to soon no longer need to depend on limited supplies of oil to prosper, as solar power will become a cheaper and more feasible alternative.

Kraft Foods. Berkshire has a large stake in Kraft and has been vocally and publicly expressing its dissatisfaction with management's capital allocation decisions. The recent acquisition of Cadbury and the sale of their Pizza business (for what Buffett says was an effective multiple of 7 times pretax earnings) were called "dumb". He did say Kraft is selling at less the sum of its parts.

China. Buffett and Munger believe China will advance civilization. That country's potential is being unleashed in the last decade in a dramatic fashion, after hundreds of years of being held back by a deleterious system of government.

Further Investments. Berkshire is now placing large amounts of money in businesses that have lower return on capital, and regulated businesses that are capital intensive (Burlington Northern and Mid American Energy). Those limitations inevitably come with Berkshire's size.