Hedge Fund Fees Take a Trim – Financial Times, December 22, 2016. The standard hedge fund industry charge of a 2 percent management fee and a 20 percent performance fee (2 and 20) has been under attack for some time. For new fund launches, the average management fee is now 1.49 percent with a 17.5 percent performance fee. With passive investments available at virtually no cost, hedge funds that are failing to outperform their benchmarks are likely to face continued pressure while new entrants will be viewed with even more skepticism.

What is Your Edge? – Base Hit Investing, December 12, 2016. John Huber identifies three main advantages that can be had in markets: informational advantage, analytical advantage, and time-horizon advantage. Most investors focus only on informational advantages where there is a great deal of competition from other investors trying to do the exact same thing, and even when obtained, informational advantages tend to be short-term in nature. Technology has reduced the ability of investors to benefit from informational and analytical advantages but the advantage accruing to time-horizon advantage has increased. We came to a similar conclusion in an article posted last year.

The Birth & Death Of A Consumer Franchise: Waldbaum’s – Intelligent Fanatics Project, December 16, 2016. This article is a summary of the rise and fall of a retail chain that most people have probably not heard about. Waldbaum’s was a supermarket chain that started from humble beginnings and grew to dominate its market under the leadership of the Waldbaum family. Izzy Waldbaum’s philosophy was to “pile it high and sell it cheap” which is reminiscent of the attitudes of other “fanatic” retailers including Sam Walton and Rose Blumkin. When Izzy died in 1947 at the age of 55, his wife Julia and their son Ira took over operations until the company was sold to A&P in 1986. Waldbaum’s then began a long decline and the brand eventually died. Julia Waldbaum’s obituary is also interesting reading. Readers might also be interested in our recent review of the Intelligent Fanatics Project.

Inequality and Skin in the Game – Medium, December 27, 2016. This is an excerpt from Skin in the Game, an upcoming book by Nassim Nicholas Taleb who is well known for his Incerto Series which is comprised of Fooled By Randomness, The Black Swan, Antifragile, and The Bed of Procrustes. The excerpt goes into some detail regarding different types of inequality, delineated by the type of inequality that people tolerate versus those that people typically find intolerable. This is a distinction that is rarely made in political debate and worth some consideration. Also, the excerpt goes into differences in social mobility between the United States and Europe.

A Breakthrough in Miniaturizing Lidars for Autonomous Driving – The Economist, December 24, 2016. The pace of development of self driving cars has been accelerating lately with more tests taking place on public roads. There are a number of technologies available to allow vehicles to partly replicate the image processing power of the human brain with most taking a “belt and suspenders” approach by combining multiple technologies. Lidar employs laser scanning and ranging to build up a detailed three dimensional image of a vehicle’s surroundings. Until recently, lidar units have been bulky and expensive but new technology could allow car makers to deploy tiny lidar units that cost less than $250 each. It is notable that Elon Musk’s Tesla Motors has, to this point, spurned the technology preferring to use cameras, radar, and ultrasonic systems in the Tesla autopilot system. For more on Elon Musk, please see our recent review of Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future.

The Best of Farnam Street 2016 – Farnam Street, December 29, 2016. If you are not reading Farnam Street on a regular basis, you are missing out on some great content. Shane Parrish lists sixteen of his posts and this is a good place for readers to start. Get 5% Better is a good article to read for anyone contemplating a new year’s resolution.

Happy New Year!

Why would you want to buy a self-driving car? – Financial Times, December 7, 2016. John Gapper believes that road transportation is likely to become a utility purchased by volume with a model similar to electricity and water. Once automobiles are truly self-driving, there will be little reason to actually own a vehicle since the same freedom of travel will be available on demand. For many people, the cost of transportation will be far lower than owning a personal vehicle. Our recent article on Elon Musk’s biography is worth reading for those interested in autonomous vehicles. This is an interesting counterpoint to Mr. Pabrai’s bullish outlook on automobile sales, although it is likely that any move toward less personal ownership of vehicles is many years away.

Overbought!!? – The Brooklyn Investor, December 8, 2016. The Brooklyn Investor looks at total returns for the Standard & Poor’s 500 over the past fifteen years along with some other market statistics. While noting that we can enter a bear market at any time, he does not see any reason to believe in an imminent threat of a “1929/1999/Nikkei 1989-like top” in the stock market. He has also set up a website as a companion for the blog which offers 13-F data along with some interesting charts on Berkshire Hathaway.

The Story of How McDonald’s First Got Its Start – Smithsonian Magazine, November 1, 2016. This is a excerpt from Ray & Joan, a recently published book by Lisa Napoli that covers the early years of McDonald’s and how Ray Kroc transformed the company. The excerpt covers the early activities of the McDonald brothers and ends right as Ray Kroc first came on the scene. This looks like a very worthwhile book for readers interested in the restaurant industry.

Does Decision-Making Matter? – The New York Times, November 25, 2016. David Brooks provides his thoughts on The Undoing Project by Michael Lewis, a new book covering the fascinating story of how Daniel Kahneman and Amos Tversky revolutionized how we think about human decision making. See also William Easterly’s review in The Wall Street Journal published on December 5. (Note: The Rational Walk will publish a review of The Undoing Project in the near future. The book is excellent and well worth reading.)

Business Blunder: Pancake Flipper Al Lapin Jr. & International Industries (IHOP) – Intelligent Fanatics Project, December 1, 2016. We recently reviewed Intelligent Fanatics Project, a book that presents case studies covering eight business success stories. In this article, Sean Iddings looks at the opposite scenario: a “fanatic” who appeared to be on the path to similar success but overreached and ended up failing to realize the potential of the brand he created.

Why Moats are Essential for Profitability (Restaurant Edition) – 25iq, November 18, 2016. Tren Griffin looks at the economics of the restaurant industry and the importance of a moat in achieving profitability. The chance of success in this business is quite low given the huge number of restaurants in the United States (624,301 as of the Spring of 2016) and the low margins resulting from vigorous competition. The kind of profitability posted by a company like Chipotle Mexican Grill until the E. coli crisis hurt results is the exception rather than the rule in this industry.

Efficiency is the Highest Form of Beauty – Mr. Money Mustache, November 24, 2016. There is much inefficiency in the way the typical consumer goes about spending money, and beauty in pursuing a more efficient personal consumption model: “Spending is a skill: a Mustachian can buy the same lifestyle with $25,000 that might cost a Consumer Sucka $100,000 per year. If you can cultivate this skill, the Art of the 75% reduction, at any income level, you can go from a lifetime of being in debt, to being rich enough to retire in less than 10 years.”

What’s Speculating? What’s Investing? Some of the Wisest Investors Weigh In – The Wall Street Journal, December 9, 2016. Jason Zweig examines the elusive nature of making hard and fast distinctions between investing and speculating. The quote from Fred Schwed Jr, author of Where are the Customers’ Yachts?, seems to resonate: “Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investing is an effort, which should be successful, to prevent a lot of money from becoming a little.”

Warren Buffett Says Donald Trump Won’t Derail the Economy – Fortune, December 5, 2016. In this interview, Warren Buffett reflects on the 2016 election. Mr. Buffett supported Hillary Clinton but believes that Donald Trump’s victory will not derail the economy and that the U.S. will be wealthier after Mr. Trump’s presidency. He also has some interesting points to make regarding free trade.

Articles are listed by broad categories:

General Investment Topics
General Industry Topics
Berkshire Hathaway
Investment Ideas
Book Reviews

Within each category, articles are listed in descending order with the most recent articles listed first.

A full listing of all articles can be found on our archive page. Readers may also search for content by keyword by using the search box that appears nearby.

General Investment Topics

Getting in on the 50th Floor — Everyone wants to invest with the next Warren Buffett just as he or she is starting out but it might be more realistic to invest with proven winners at a later stage of development.

The Problem of Rational Capital Allocation — An essay on the perils and opportunities of capital allocation.

The Individual Investor’s Edge — Timeframe arbitrage is among the most powerful edges an individual has over professional investors who are accountable to clients.

Munger’s Prescription for Corporate Governance — Corporate governance, Munger style.

The Value Investor’s Guide to Value Line Investment Survey — A brief tutorial on how to best utilize Value Line.

Graham’s Advice on Relatively Unpopular Companies — Applying Benjamin Graham’s teachings to the investment environment of mid-2010.

The Dangers of Commitment Bias — One of the “deadly sins” of investing is explored but, of course, commitment bias can plague decision making far beyond investing.

Investors Must Take Responsibility for Executive Compensation — Investors must take responsibility for exerting their rights as owners and setting executive compensation appropriately. Pair with Exposing the Compensation Consultant Smokescreen, Motives Behind Value Destroying Mergers, and Kraft’s Executive Compensation Policies Reward Value Destruction.

The Value Investor’s Technology Dilemma — Personal reminiscences of the eBay IPO in September 1998 from an employee of another software company operating down the hall.

Strategies for Achieving Economic Moats — This is a general discussion of economic moats influenced by Charlie Munger, Philip Fisher, and Michael Porter.

The Virtue of Pessimism for Investors — Bruce Berkowitz refers to his research process as, in part, an effort to “kill the company” which essentially inverts the typical process employed by most investors. We explore some of the ramifications of this approach.

Net Current Asset Value Stocks — A brief overview of the cigar-butt method of security selection pioneered by Benjamin Graham.

Coping With Market Meltdowns — Written in early March 2009 very close to the bear market bottom, this article contains personal reflections on dealing with market declines.

General Industry Topics

Pitfalls in Oil & Gas Accounting — Much to our surprise, this has become one of the more popular articles on The Rational Walk over the years.

Rockefeller vs. Railroads: Regulatory Debate Heats Up in Washington — In this popular article, we discuss talk of revisiting the 1980 Staggers Rail Act and point out some interesting trivia related to the Rockefellers.

Robert Rubin: “I Did Not Want Significant Operational Responsibility” — Robert Rubin comments on what he thought his responsibilities were in exchange for $126 million in cash and stock compensation over a decade at Citigroup.

Greenspan: Those Who Predicted Housing Bubble are “Statistical Illusions” — In a bit of revisionism, Alan Greenspan explains away Michael Burry and others who foresaw the housing crash as statistical illusions.

Catastrophic Health Insurance and HSAs Can Control Costs — An editorial on the healthcare industry written on the eve of the passage of the Affordable Care Act (also known as “ObamaCare”) in March 2010.

Expand a Competitive Moat by Closing on Sundays? — The counter-intuitive step of closing on Sunday could provide a competitive edge for certain businesses.

How to Fail in Retail: Six Easy Steps! — How to fail in running a grocery store.

Can Traditional Print Newspapers Survive “Creative Destruction”? — It is interesting to look back at this article written in 2009, a time when the demise of print newspapers was further on the horizon than it is today, yet still quite apparent.

Berkshire Hathaway

Berkshire Hathaway in 2026 — A forward looking assessment of Berkshire’s prospects over the next ten years from the perspective of April 2016.

Revisiting Berkshire Hathaway’s Acquisition of BNSF — Looking back at the BNSF acquisition from the perspective of late 2013.

Assessing the Past Decade at Berkshire Hathaway — A view of Berkshire Hathaway’s ten year history as of early 2012.

Sokol’s Resignation Raises Questions Regarding Lubrizol Transaction — We covered David Sokol’s resignation from Berkshire Hathaway in considerable detail. Mr. Sokol claimed that he shouldn’t have shared his idea with Warren Buffett and there were also contradictions that surfaced in his subsequent interview with CNBC. Ultimately, Mr. Sokol was not charged with any violations of securities law.

Video Interview with Ajit Jain — A rare interview with Ajit Jain from early 2011.

Buffett Seizes Opportunities During Financial Crisis — An essay describing Warren Buffett’s opportunistic side during the financial crisis.

Berkshire Likely to Pay Dividends Eventually – But Not This Year — The perpetual dividend discussion from the perspective of early 2011.

What We Known (And Don’t Know) About Berkshire’s Succession Planning — The known knowns, known unknowns, and unknown unknowns of Berkshire Hathaway’s succession planning as of late 2010.

The Collector: 1977 WSJ Article on Buffett Strikes Familiar Themes — A discussion of one the first major articles on Warren Buffett published in the Wall Street Journal.

Highlights From Buffett’s Partnership Letters — Berkshire shareholder Frank Gifford provided The Rational Walk with detailed notes on Warren Buffett’s partnership letters at a time when little information regarding the letters was available to the public. Pair with our subsequent review of Warren Buffett’s Ground Rules.

Charlie Munger’s Latest Parable: Basically It’s Over — An optimistic account of the future beneath the gloomy surface.

From Cigar Butts to Business Supermodels — An account of the evolution of Warren Buffett’s early investment style.

Berkshire’s Misunderstood Derivatives — Written in early 2009, this article explores common misconceptions regarding Berkshire Hathaway’s derivatives exposure. Although derivatives have become less important to Berkshire over time, some exposure will remain for several more years.

Investment Ideas

Company Profile: DaVita Healthcare Partners — Profiling one of Ted Weschler’s favorite stocks in October 2016.

Company Profile: TransDigm Group — A classic “outsider” run company is profiled in April 2016.

Company Profile of Expeditors International — A profile of Expeditors written in early 2016. We soon followed up with a profile of C.H. Robinson.

Examining Progressive’s Competitive Position — A profile of GEICO’s main competitor written in early 2016.

Markel Corporation at $800/share — We examine Markel Corporation at a key psychological milestone in mid 2015. We revisited Markel in May 2016 with a focus on Markel Ventures. We again revisit Markel Ventures and the valuation of the company as a whole in November 2016.

Contango Oil & Gas: Compelling Opportunity for Natural Gas Bulls — An ill fated write up (and investment) in the oil and gas industry written in September 2012 with a follow-up in October 2012. Following the announcement of a merger with Crimson Exploration and the untimely death of CEO Kenneth Peak, we concluded that the facts had changed and invalidated the original thesis.

Joy Global: A Misunderstood Cyclical? — Inspired by an article in the Graham & Doddsville newsletter, we examine the track record of Joy Global in mid-2012.

Loews Corporation: Cheap on Sum-of-the-Parts Basis — A 2012 view of the Rodney Dangerfield of value stocks with a subsequent follow-up in 2013. We presented another follow-up in early 2016 when, as seems perpetual, Loews was still cheap on a sum-of-the-parts basis.

Daily Journal: Declining Publisher or Rising Hedge Fund? — A discussion of Charlie Munger’s “other company”.

Platinum Underwriters: Mining for Value in Reinsurance — An article accompanying a published report on Platinum and a follow-up in early 2014.

What Does Warren Buffett’s Valuation of GEICO Imply for Progressive? — Inferring Progressive’s value based on Warren Buffett’s valuation of GEICO as described in the Berkshire Hathaway 2010 annual report.

Investors Title Represents Value in Midst of Housing Turmoil — Title insurance was a fertile field for value investing in late 2010. Also see a follow-up post in early 2011 on hidden real estate value on Investors Title’s balance sheet. We later follow up (prematurely, in retrospect) and declare that Investors Title has approached intrinsic value.

Contango Ore: An Intelligent Gold and Rare Earth Speculation? — In a departure from value investing, we examine a speculative spin-off from Contango Oil and Gas.

Why Is Todd Combs Bullish on Western Union? — A look at Western Union after the announcement that Todd Combs would be joining Berkshire Hathaway as a portfolio manager.

Assessing Steve Ballmer’s Track Record at Microsoft — An assessment of Mr. Ballmer’s record three years prior to his resignation as CEO.

Tractor Supply Offers a Compelling Growth Story — A profile of a rapidly expanding niche retail concept.

Noble Corporation: Profile and Analysis — Short write-up of Noble Corporation in the wake of the Deepwater Horizon disaster. A follow-up article was posted in early 2011. See also other coverage of the oil and gas industry.

Examining Middleburg Financial: David Sokol’s Favorite Bank? — A discussion of Middleburg Financial written in early 2010.

George Risk Industries: A Potential Bargain With Limited Downside Risk — A net-net in a boring industry located in Nebraska sparked interest in early 2010 and generated reader questions. Also see this follow-up article written in mid-2010.

Book Reviews

For all book reviews published on the Rational Walk, click here. The following links represent the most important and/or popular reviews.

Berkshire Beyond Buffett — Lawrence Cunningham examines Berkshire’s prospects after Warren Buffett leaves the scene.

The Manual of Ideas — A review of John Mihaljevic’s investment classic.

Howard Marks on the Human Side of Investing — A review of The Most Important Thing which has become an investment classic over the past few years.

Using Checklists to Control Emotions During Market Meltdowns — A review of Atul Gawande’s The Checklist Manifesto and an application of the principles to the field of investing.

The Big Short Tells a Cynical Tale of the Subprime Fiasco — A cynical and timely tale of the subprime bubble.

Lessons from Andrew Ross Sorkin’s “Too Big to Fail” — A review of one of the first books to be published covering the 2008-09 financial crisis.

Pleased But Not Satisfied by David Sokol — A review of the Berkshire Hathaway executive David Sokol’s memoir. The article was written prior to his fall from grace in the Lubrizol scandal of 2011.

In-N-Out Burger’s Remarkable Moat — A review of Stacy Perman’s book on In-N-Out Burger, one of the most enduring and beloved brands on the west coast. Also see In-N-Out Burger: Building a Succession-Proof Business.

Greenblatt’s Advice on Special Situations — A review of Joel Greenblatt’s classic book on special situations, You Can Be a Stock Market Genius.

Personal History by Katharine Graham — A brief review of Katharine Graham’s bestselling memoir.

Selecting a Buffett Biography: Lowenstein vs. Schroeder — Brief review of both major Warren Buffett biographies currently on the market.

Thoughts on Graham and Dodd’s Security Analysis: Sixth Edition — Book review of a classic that requires no introduction.

How Can Value Investors Apply Philip Fisher’s Investment Principles? — A book review of Phil Fisher’s classic, Common Stocks and Uncommon Profits.

The Essays of Warren Buffett: Convenient Arrangement of Shareholder Letters — A book review of Lawrence Cunningham’s 2nd edition of his compilation of Berkshire Hathaway shareholder letters.

Madoff’s Weapons of Influence — A book review of Robert Cialdini’s masterpiece, Influence: The Psychology of Persuasion, and how Bernie Madoff’s leveraged psychology to manipulate the victims of his ponzi scheme.

Is Indexing Worse Than Marxism? – The Wall Street Journal, November 24, 2016. Burton G. Malkiel, who is very well known for his book, A Random Walk Down Wall Street, takes on critics who are claiming that index funds pose grave dangers to the stock market, the overall economy, and perhaps to capitalism itself. Mr. Malkiel acknowledges that an efficient market requires some active traders who analyze and act on new information but suggests that the proportion of active managers could shrink to as little as 5-10 percent of the total and still provide sufficient efficiency.

Faith, Feedback and Fear: Ready for the Valeant Test? – Musings on Markets, November 22, 2016. NYU Professor Aswath Damodaran recaps the past several months at Valeant and revisits his investment thesis that led him to purchase shares at $27 in May 2016, a time when his analysis led him to believe that the intrinsic value of shares was $44. Although recent events have reduced his intrinsic value estimate to $32.50, the share price has also declined. This led Prof. Damodaran to double his Valeant holdings at $15. His article follows news of Lou Simpson’s exit from Valeant in the third quarter.

How Two Trailblazing Psychologists Turned The World of Decision Science Upside Down – Vanity Fair, November 14, 2016. Amos Tversky and Daniel Kahneman are best known for their groundbreaking research in the field of behavioral economics, much of which was set forth for popular audiences in Daniel Kahneman’s recent book, Thinking, Fast and Slow. In this article, adapted from The Undoing Project: A Friendship That Changed Our Minds, Michael Lewis discusses the evolution of thought, research, and experience that led to breakthroughs that would forever change how economists view real world decision making.

William Ackman’s 2016 Fortune: Down, but Far From Out – The New York Times, November 15, 2016. Bill Ackman’s Pershing Square is on course for a second year of double-digit annual losses, but many big investors believe that his firm will turn the corner. Mr. Ackman’s most prominent mistake has been Valeant Pharmaceuticals which has plunged over 90 percent from the average of $190 that Pershing Square paid to acquire a big stake in 2015. Mr. Ackman has secured two board seats to influence a turnaround strategy. More recently, Mr. Ackman has acquired a significant stake in Chipotle Mexican Grill (see also New York Times article on November 18 and The Rational Walk’s recent coverage of Chipotle).

Bonds Down, Stocks Up! – The Brooklyn Investor, November 22, 2016. The Brooklyn Investor explores the relationship between interest rates and equity prices over many decades along with the implications for equity valuations in periods of rising interest rates. Since the presidential election on November 8, interest rates have risen quite sharply while stock prices have also rallied. In theory, higher interest rates should act as a downward pressure on equity valuations, but this relationship is not precise and also depends on whether the stock market ever completely “priced in” the period of abnormally low interest rates that have prevailed since the financial crisis.

Warren Buffett’s Meeting with University of Maryland Students – By Dr. David Kass, November 20, 2016. Warren Buffett met with twenty students from each of eight universities on November 18. During the session, he responded to twenty student questions over a period of 2 1/2 hours. The questions range from politics to economics to questions about specific investments such as Berkshire’s recent foray into airline stocks.

The Money Management Gospel of Yale’s Endowment Guru – The New York Times, November 5, 2016. David Swensen runs the $25.4 billion Yale endowment which is one of the largest in the country. Mr. Swensen is best known for pioneering an investment strategy that includes holdings in real estate, private equity, and venture capital along with other alternative investments. This is in contrast to the more typical stock and bond allocations common in endowment fund management. Mr. Swensen took over management of the $1 billion endowment in 1985 at a time when it provided 10 percent of Yale’s annual budget. The endowment provides 33 percent of the budget today. In this article resulting from a series of interviews, Mr. Swensen provides insights on active vs. passive management, activist investors, and his experiences during the financial crisis, as well as many other topics.

Like Buffett, Another Folksy Investor Turns Patience Into Profit – The Wall Street Journal, May 22, 2015. Jason Zweig shares his experiences covering the 2015 Markel Corporation annual meeting in Richmond, Virginia. This article, focusing on Markel’s co-CEO Tom Gayner, might be of interest to readers who have been following The Rational Walk’s recent coverage of Markel.

Quit Social Media. Your Career May Depend on It – The New York Times, November 19, 2016. Cal Newport, who describes himself as a “millennial computer scientist” and author makes the case against the use of social media. Although his complete absence from social media may be considered extreme, the author’s warning regarding the risk of distraction warrants consideration: “Consider that the ability to concentrate without distraction on hard tasks is becoming increasingly valuable in an increasingly complicated economy. Social media weakens this skill because it’s engineered to be addictive. The more you use social media in the way it’s designed to be used — persistently throughout your waking hours — the more your brain learns to crave a quick hit of stimulus at the slightest hint of boredom.”

The Quest for 10-100 Baggers – The Compounders, November 9, 2016. This is actually a video of a talk given by Mohnish Pabrai at Peking University (rather than reading material) but it is quite interesting given the subject matter. Many readers will want to subscribe to The Compounders in order to follow Mohnish Pabrai’s thoughts on investing. Also, readers may want to follow his portfolio activity on dataroma which provides an easy way to keep up with 13-F filings.

The David Rubenstein Show: Warren Buffett – Bloomberg, November 4, 2016. This is a video of David Rubenstein interviewing Warren Buffett at Gorat’s Steakhouse in Omaha. While there were no groundbreaking revelations in this conversation, it was interesting to hear Warren Buffett describe his use of computers. In the past, he described his use of computers as primarily a tool for playing online bridge. Apparently he is now using a computer quite extensively for research purposes.

FreightCar America – Barel Karsan – Value Investing, November 9, 2016. At the time this post was published, FreightCar America was apparently a “net-net” although the stock price is up quite a bit over the past few days. Net-nets were a favorite hunting ground for Benjamin Graham as well as for Warren Buffett during his early years, and even made a few appearances during and after the 2008-09 bear market. However, net-nets have been more rare recently so it is interesting to see an article discussing a current example.

Steve Ballmer Says Smartphones Strained His Relationship With Bill Gates – Bloomberg, November 4, 2016. (Article and video). Steve Ballmer discusses his working relationship with Bill Gates, his tenure as CEO, as well as the circumstances that led Microsoft to miss the smartphone revolution. He does admit some mistakes related to his initial reaction to the iPhone which apparently did not factor in the possibility of carrier subsidies to defray the high sticker price of smartphones in the $500+ range.

Afraid of What Comes Next for the Markets and Economy? Read This – The Wall Street Journal, November 9, 2016. Jason Zweig argues that a time of political shock is not the right time to make major changes in an investment program. Indeed, the events of the past week prove this point with stocks initially rising early last week in anticipation of a Hillary Clinton victory, then falling precipitously in the futures market when Donald Trump’s victory appeared certain, and then rallying strongly in the days that followed when nearly everyone expected a market crash in the event of a Trump win.

How to Invest When You Only Have an Hour a Day to Do It – Gannon on Investing, November 10, 2016. Geoff Gannon receives a reader question regarding the strategies open to someone who has five to ten hours per week to devote to investing a portfolio under $1 million. He argues for spending a very focused hour every day on security selection with an emphasis on stocks that can be held indefinitely so that there is no need to devote much thought to the selling decision. The majority of investors with such a limited amount of time to devote to the endeavor should either delegate the task or purchase a market index but those who want to pursue an active strategy will find this advice interesting.

Becoming an Expert: The Elements of Success – Farnam Street, November 7, 2016. This article is a discussion of the factors that underpin success. Is success driven by luck, innate talent, or hard work? Or a combination of several factors? The article refers to Malcolm Gladwell’s “10,000 hour” theory of deliberate and focused practice for those learning a skill. Ultimately, those who want to develop world class ability in any field must not only attain but maintain a skill. And in order to grow a skill, it is necessary to constantly strain to achieve a target just out of reach. This seems intuitively true and applicable in broad areas of human endeavor.

When do you give up on a stock? – Oddball Stocks, November 3, 2016. Nate Tobik outlines his views regarding one of the most difficult decisions for investors: when to change your mind and sell a stock. There are obviously many reasons to give up on an investment. The bottom line is that “if you’re holding a stock where the story changed, the company changed, the company failed to execute on plans or you have better opportunities it’s time to sell.” Phil Fisher was an advocate of selecting investments so carefully that they almost never need to be sold. That’s a worthy goal but having selling criteria in mind, in advance, seems like a prudent policy for intelligent investors.

Do recent events foreshadow a large-scale cyber aggregated loss? – Property Casualty 360, November 2, 2016. One of the basic principles of running an insurance company is that underwriters must take great care to never write a series of policies that, in aggregate, could threaten the solvency of the firm based on a single event. For risks like hurricanes, it is likely that most underwriters understand how to limit aggregate losses, but is this the case for new types of risk that may not yet be well defined? The “cyber insurance” industry can be defined in many ways. What happens when many insureds suffer an event like a major hack all at once? “This could trigger a loss equivalent to a Katrina-level hurricane.”

Wells Fargo’s Stars Thrived While 5,000 Workers Got Fired – Bloomberg, November 3, 2016. Two months after the scandal first broke, headlines about Wells Fargo continue to appear on a regular basis. Reporters are seeking additional information through interviews with past and current Wells Fargo employees and the news isn’t getting any better. “No one was ever penalized for doing the wrong thing until there was critical mass,” said Michael Bruns, a banker at Wells Fargo branches in Silicon Valley from 2009 to 2012. “Instead, they were promoted. They became our bosses and the people who are running the company today.”

Chipotle Eats Itself – Fast Company, October 16, 2016. This lengthy article is probably the best account of Chipotle’s reaction to the E. coli outbreak that took place a year ago. The author had a great deal of access to Chipotle executives and was able to observe and inspect restaurants, central kitchens that Chipotle came to rely on after the outbreak, reactions of executives at the shareholder meeting, and much more. The 30 to 60 minutes required to read the article is worthwhile for anyone seriously following the company.

The Competitive Advantage of an Owner-Operator – Base Hit Investing, November 1, 2016. John Huber thinks that firms that are run by the founders can have a significant advantage because founders are often motivated by more than money. This “driving force” can be incredibly powerful. Not all incentives have to do with money. Many founders have a level of intensity regarding their business that is driven by all sorts of intangible factors that go well beyond amassing wealth. Although Warren Buffett did not technically “found” Berkshire Hathaway, he effectively started the company fifty years ago and embodies the owner-operator mindset. Whether this attitude will extend to the next CEO is a topic we have often considered.

Strength Training is Learning from Tail Events – Nassim Nicholas Taleb via Medium, November 6, 2016. Risk and random events extend to topics beyond financial markets. In this article, the author discusses tail events and how they apply to the human body. “Indeed, our body should be seen [as] a risk management system meant to handle our environment, paying more attention to extremes than ordinary events, and disproportionally learning from these.”

Why C.E.O.s Are Getting Fired More – The New Yorker, November 7, 2016. Although it is hard to shed many tears when it comes to CEOs facing adversity in light of their elevated compensation, apparently the standards for performance are higher than in the past according to James Surowiecki. “Some C.E.O.s have a very lofty opinion of themselves, and when they’re told they have to go they’re almost always shocked.”

How I became a time-millionaire – The Financial Times, November 1, 2016. Nilanjana Roy discusses the concept of being a “time-millionaire”, a measure that is loosely correlated with the extent to which a person has control over his or her time. This is quite an amorphous concept and cannot be as clearly measured as money in the bank. However, the importance of having control of one’s time cannot be emphasized enough when it comes to understanding human happiness.

Interview with Robert Cialdini – Hsu Untied, October 28, 2016. Richard Hsu interviews Dr. Robert Cialdini, author of Influence and Pre-Suasion, which we reviewed recently. This 25 minute podcast is definitely worth listening to for anyone intrigued by these books as well as for those who have already read the books.

What I Read, and Why – Jason Zweig, June 30, 2014. “If you want to think long-term, you can’t spend all day reading things that train your brain to twitch.” That is a great observation, and it is getting harder and harder to avoid sound bite information online these days. Jason Zweig provides his list of recommended reading which includes a number of blogs as well as several books, not all of which have to do with business and investing.

Gotham’s New Fund — The Brooklyn Investor, October 29, 2016. The Brooklyn Investor only posts new content every few months but remains one of the best value investing blogs to follow. The primary topic of this post involves Joel Greenblatt’s new fund: Gotham Index Plus. Brooklyn Investor also provides some thoughts on Chipotle Mexican Grill (recently discussed on The Rational Walk as well) and various other fast food concepts.

My Chipotle Nightmare — CNN Money, October 28, 2016. Sometimes elements of the “cure” pursued by companies in order to address a “disease” can just make matters worse. Chipotle has suffered a significant decline in business since the E. coli story broke in late 2015 and has been suffering from diseconomies of scale as a result. In order to contain margin compression, management has attempted to contain costs. There is nothing wrong with doing so but cost control must be done in a way that does not harm the company’s culture. This article provides some disturbing evidence that the incentive structure at Chipotle might be having consequences that top executives did not intend.

What the AT&T Merger Can Learn from AOL-Time Warner — The Wall Street Journal, October 25, 2016. In this opinion piece, Steve Case provides his thoughts on the proposed merger of AT&T and Time Warner stating that it feels like “déjà vu” given how similar the story line is to the ill fated AOL Time Warner transaction sixteen years ago. This is obviously a topic that Mr. Case knows well given his role as CEO of AOL at the time of the AOL-Time Warner merger in 2000. What lessons can today’s executives learn? (1) Having the right idea isn’t enough; (2) Culture is more than a buzzword; (3) A “one company” strategy is key.

Tapped Out at Sam Adams — Bloomberg, October 21, 2016. James Koch founded the Boston Beer Company in 1984 and played the leading role in the rise of craft beer in the United States. At a time of rapid consolidation for the beer industry as a whole, there has been a proliferation of craft breweries in the United States in recent years. Despite a long term track record of growth, Boston Beer has hit some serious headwinds as newer craft beers compete for shelf space and consumer attention. Mr. Koch has retained control of Boston Beer and many assume that he is not willing to consider a sale. However, this Bloomberg article suggests that Boston Beer could be an acquisition target and posits that Constellation might be a logical buyer.

Bill Miller Thinks We’re in a Secular Bull Market — Market Folly, October 24, 2016. Bill Miller is known as a value investor and had one of the most enduring track records in the business until the 2008 financial crisis. He is fully invested today stating that “cash earns zero, why do I want something that earns zero?” This article lists some of the stocks he likes including Amazon.com which he has owned since the IPO and is his largest position. He states that “as long as stocks yield more than bonds, stocks are attractive.” Many investors might question how actionable this advice really is given that there is no way to know when bond yields will rise or whether a normalization of yields will be gradual or sudden.

SEC Probes Whether Companies Are Misusing Adjusted Earnings Metrics — The Wall Street Journal, October 27, 2016. GAAP accounting has well known limitations but lately the gap between GAAP and non-GAAP presentations has seemed to grow into a Grand Canyon sized chasm for certain companies (Twitter is an excellent example). The SEC is now probing whether additional rules are required to prevent companies from directing investor attention toward non-GAAP presentations without making clear the underlying adjustments. Companies have long been required to provide non-GAAP reconciliations so this seems to be more a matter of presentation rather than real substance. As is always the case in the minefield of investing, caveat emptor.

The Rule of 72 — know72.com, October 28, 2016. Well known value investor Mohnish Pabrai has started a blog and is also now on Twitter (@MohnishPabrai). The name of the blog as well as the topic of this article is the well known “rule of 72” that is used as a simple mental shortcut to determine how long it takes for an investment to double at various expected rates of return.

Moving the Finish Line: The Goal Gradient Hypothesis — Farnam Street, October 24, 2016. Any runner knows that as the finish line appears, it is normal to try as hard as possible to speed up which results in a “mad dash” to the finish. The principle of the goal gradient effect is equally applicable in many other contexts which are discussed in this article. In particular, it is interesting to read the thoughts on how to best set up incentive systems based on the idea of keeping the “finish line” in sight.

Notes on Giving Away my First $100,000 — Mr. Money Mustache, October 26, 2016. In this article, Mr. Money Mustache describes how he recently went through the process of giving away $100,000. As Warren Buffett has often stated, the task of giving away money is arguably just as difficult or even more difficult than earning the money to begin with. At the very least, it requires a different skill set. Whether one agrees with the author’s choice of charities (see the comments section) or not is really beside the point; what seems more relevant is the question of how much money to give away relative to your net worth and how to ensure that it is well deployed.

The Purpose of Life Is Not Happiness: It’s Usefulness — Medium, October 3, 2016. Medium is an online publishing platform developed by Twitter co-founder Evan Williams. One of the interesting things about this platform is that it exposes the thoughts of writers one would not normally be familiar with. It is kind of a “long form” version of Twitter and well integrated with the Twitter platform. In this article, Darius Foroux argues that the concept of “always being useful” is the right mindset and focusing on happiness exclusively might lead people down the wrong path. (The Rational Walk is also now on Medium, although for now the limited content that has been posted only duplicates what is on the website. That might change in the future.)

Warren Buffett Loves This Business — Maybe a Little Too Much — Bloomberg, October 20, 2016. Reinsurance has long been among the most important businesses for Berkshire Hathaway. Years of ultra-low interest rates on bonds coupled with capital flowing into the industry have combined to create a difficult competitive landscape. We should note that Berkshire Hathaway has been through many insurance industry cycles and has demonstrated a willingness to constraint premium volume when faced with inadequate pricing. The article suggests that Ajit Jain is trying to deal with a “cost problem” at General Re and will be overhauling the company’s compensation strategy. It will be interesting to observe the balance that is struck between cost containment and ensuring that incentives to reject poorly priced policies are retained.

Buffett’s Three Categories of Returns on Capital — Base Hit Investing, October 18, 2016. John Huber makes interesting observations regarding how Warren Buffett thinks about businesses in terms of their return on capital profile. He then provides some thoughts on Chipotle Mexican Grill and Markel Corporation. Also see The Rational Walk’s recent discussion of Chipotle and earlier coverage of Markel.

Why The Prophets of Buffett Get it Wrong — Financial Times, October 16, 2016. Countless investors talk about following Warren Buffett’s example but how many actually implement his process in reality? “There are plenty of people out there who call themselves Buffett acolytes — and as far as I can see they are all phoneys,” says John Hempton, an Australian fund manager.

Wells Fargo’s Former CEO May Have Been Warned of Phony Account Fraud As Early As 2007 — Fortune, October 18, 2016. John Stumpf’s resignation and daily full page advertisements in The Wall Street Journal have not been enough to contain the crisis at Wells Fargo. There is increasing evidence to suggest that bank executives knew, or should have known, about fraudulent sales activities well before 2013. It seems like executives must either confess to being complicit or to being incompetent. The latter might be a more attractive option from a legal perspective.

Is Bill Ackman Toast? — Vanity Fair, October 17, 2016. The setbacks experienced by Bill Ackman in recent months have been well documented. As is the case when a fund manager experiences hard times, people seem to come out of the woodwork to offer critiques and analyses of past mistakes. An unnamed hedge fund manager is reported to claim that Mr. Ackman’s fund has “returned zero”, which is at odds with others familiar with his record. But is Bill Ackman Toast? The article concludes by pointing out that the fund has more than $6.5 billion in permanent capital which perhaps answers the question posed by the title.

The Patients Hurt by Theranos — The Wall Street Journal, October 20, 2016. This article goes into quite a bit of detail regarding patients who were misdiagnosed by Theranos and the consequences that they faced due to the errors. These stories are disturbing, to say the least, and highlight the level of ethics required for companies to operate within the health care industry. Wells Fargo’s scandal is serious but only involves money whereas the Theranos situation is a matter of life and death.

Will Apple Kill Its Own Driverless Car? — Vanity Fair, October 17, 2016. Rumors have been swirling for quite a while regarding Apple’s ambitions to build an automated vehicle. Apple seems to have more leaks these days compared to the level of control imposed by the late Steve Jobs when he ran the company. While perhaps bad for shareholders, these leaks make for interesting reading as we can see from Vanity Fair’s reporting based on “sources within the company”. Shareholders should continue to question whether these types of initiatives represent a good use of the company’s formidable cash balance and ongoing free cash flow.

Elon Musk’s Empire: The entrepreneur’s finances are as jaw-dropping, inventive and combustible as his space rockets — The Economist, October 22, 2016. Elon Musk is widely admired for his propensity to take innovative risks while also often criticized for the financial maneuvering required to fund those risks. Despite a multi-billion dollar net worth, Mr. Musk has little personal liquidity and his companies require ongoing funding from the investment community. The Economist explores the financial aspects of Elon Musk’s empire in this article. Also see Elon Musk’s Wild Ride published by Bloomberg on October 12.

Peter Bevelin on Seeking Wisdom, Mental Models, and Learning — Farnam Street, October 17, 2016. Peter Bevelin is the author of Seeking Wisdom: From Darwin to Munger and All I Want to Know is Where I’m Going to Die So I Never Go There (purchase these books from the links provided in the Farnam Street article). In a wide ranging interview, Mr. Bevelin explains his motivation behind publishing these books and provides more information regarding his background.

Joel Greenblatt’s Investing Secrets Revealed – Barron’s, October 15, 2016. Joel Greenblatt, co-founder of Gotham Asset Management, has an exceptionally strong investment track record and is closely followed by value investors. As the author of You Can Be a Stock Market Genius, The Little Book That Still Beats the Market, and The Big Secret for the Small Investor, Mr. Greenblatt’s views have been widely disseminated in recent years. However, many investors are not inclined to do the work to actively invest their portfolio based on these techniques. Mr. Greenblatt created a series of hedge funds for investors who wish to delegate the task. More recently, he created Gotham Index Plus which he discusses in this Barron’s interview along with his bullish views on Apple and CVS.

The Best Way to Improve Investment Skills: “One Case Study After Another” – Base Hit Investing, September 27, 2013. John Huber describes how case studies are an integral part of his investment process. Case studies involve reading about specific investment results and then attempting to reverse engineer the thought process that the investor had when the decision was made to buy the stock. By learning from the successes and mistakes of others, one can begin to build a picture of the right checklists and mental models to adopt in order to achieve success and avoid failure. As an aside, one of the most popular posts on The Rational Walk in recent memory was a review last week of Inside the Investments of Warren Buffett, a book that uses the case study approach to look at what the author considers to be Mr. Buffett’s twenty most important investments.

Deutsche Bank: A Greek Tragedy at a German Institution? – Musings on Markets, October 6, 2016. Musings on Markets is the personal blog of Aswath Damodaran who is Professor of Finance at the Stern School of Business at NYU. One of the nice things about this blog involves the valuation models that are provided as well as video commentary accompanying most posts. This post on Deutsche Bank is particularly interesting for those who do not necessarily understand large financial institutions that well and want to get an overview as well as potential models to pursue a valuation.

Imagining a Cashless World – The New Yorker, October 10, 2016. The widespread use of credit cards and, more recently, completely virtual methods of payment such as Apple Pay, might obscure the fact that cash still serves as the payment mechanism for 85 percent of consumer transactions globally. For consumers in advanced economies, particularly younger individuals, paying with cash is increasingly the exception rather than the rule. Larry Summers recently advocated for elimination of the $100 bill. Kenneth Rogoff’s recent book, The Curse of Cash, has only added to the debate over whether advanced economies should move to eventually eliminate currency. In The New Yorker article, Nathan Heller describes his travels in Sweden where the use of cash has become increasingly rare. In many cases, it is not even possible to pay with cash. There are serious implications associated with the elimination of cash including further erosion of personal privacy and the risk of giving governments the ability to confiscate wealth through negative interest rate policy. Mr. Heller’s lengthy narrative gives us a picture of how a cashless society might look in practice. For some of the common objections, see Elaine Ou’s Bloomberg article: The Cashless Society Is a Creepy Fantasy.

At Some Point, You Have to Eat The Broccoli – Farnam Street, October 10, 2016. No matter how attractive a proven methodology might be, there is no practical value in it if people merely read about it and fail to put it into practice. The Farnam Street is a well known intellectual hub for those interested in the type of multi-disciplinary thinking long advocated by Charlie Munger. Many of these concepts are deceptively simple. For example, one can read over 9,000 pages per year by committing to read only 25 pages per day. This is pretty close to a 10,000 page-per-year goal that would cover around 30 average size books. It sounds really good and not hard to implement in practice but few people who read about it will actually follow through. However, eventually as habits develop, reading 25 pages per day might not seem like eating broccoli: “And the real and comforting truth is that you might really start liking, and even get used to eating, broccoli. Eating potato chips and candy will eventually feel like the uncomfortable and unnatural thing.”

John Maynard Keynes: Courage Is the Key to Investing – The Wall Street Journal, October 14, 2016. Most likely, everyone reading this will know John Maynard Keynes primarily as the author of The General Theory of Employment, Interest, and Money rather than as an investor to potentially emulate. However, Keynes was, in fact, a great investor and much of his success can be attributed to the fact that he bravely purchased U.S. stocks during the worst periods of the Great Depression. Losing money at least “on paper”, which is inevitable when buying stocks in relentlessly falling markets, is almost unbearable for the vast majority of investors. Those who have the temperament to be courageous during difficult times and also employ a solid intellectual framework for investing have a durable edge.

Can America Trust Its Aging Nuclear Arsenal? – The Wall Street Journal, October 15, 2016. Much has been written recently regarding whether the candidates running for President have the temperament required to effectively deal with the demands of the job. No demand is greater than the potential use of nuclear weapons. In this essay, Steven Koonin describes his experiences as a physicist who has served on the governing boards of the Los Alamos, Lawrence Livermore, and Sandia National Laboratories. Due to aging facilities and lack of a testing program in recent decades, the effectiveness of the nuclear arsenal cannot be taken for granted. According to Mr. Koonin, “The goal should be a long-term strategic view of managing our nuclear-weapons complex and investing in it. Otherwise, the question of who can be entrusted with the nuclear “button” will eventually give way to concerns about whether, in that awful eventuality, the button is connected to anything that actually works.”

2016 Nobel Prize in Economics – The Royal Swedish Academy of Sciences, October 10, 2016. Oliver Hart and Bengt Holmström were awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Their work has to do with “contract theory” and involves much thought regarding the incentive systems created by various forms of contracts including executive compensation. As Charlie Munger often says, “Never think about something else when you should be thinking about the power of incentives.” This link is for the press release announcing the prize. There are links to background papers at the end of the press release.

Hurricane Matthew to Test Catastrophe Bond Market – Wall Street Journal 10/7/2016. With Hurricane Matthew swirling just off the coast of Florida, media attention is rightly focused on the safety of individuals in the path of the storm. However, attention will soon turn to the inevitable property destruction and losses. This article examines the increasing popularity of catastrophe bonds and the potential impact on the market due to the hurricane. Earlier this year, we examined Markel’s exposure to this market.

Mars Cashes Out Warren Buffett to Take Control of Wrigley – New York Times, 10/7/2016. Berkshire Hathaway previously indicated that 50 percent of its $2.1 billion preferred share investment was likely to be redeemed during the current quarter. However, Mars has also negotiated to redeem the remaining 50 percent that was scheduled to remain in place until 2021. Terms have not been disclosed but are likely to involve a premium for the early redemption.

Former Wells Fargo Employees Describe Toxic Sales Culture, Even At HQ – NPR Morning Edition, 10/4/2016. The troubling news from Wells Fargo continues with NPR’s interview of several lower level employees who describe a toxic culture at the Wells Fargo retail branch in the lobby of the company’s San Francisco headquarters. Did Chairman and CEO John Stumpf ever stop in to interact with these employees or observe the branch culture?

Why Climate Skeptics Should Support a Carbon Tax – Wall Street Journal, 10/3/2016. Greg Ip makes the case for a carbon tax as an insurance policy to address the risks arising from climate change along with reasons to support this change in policy even if one remains unconvinced regarding the seriousness of human driven climate change.

Howard Marks on His Approach to Inverting (Video) – Bloomberg, 9/28/2016. Howard Marks is closely followed in the value investing community and author of The Most Important Thing. In this interview, Mr. Marks provides his thoughts on current market conditions in the equity and fixed income markets. We are currently somewhere in the “7th inning” of this market cycle, although there is always the risk of being in the 8th inning without realizing it.

Q&A: What Keeps Vanguard Founder Jack Bogle Ticking? – Reuters, 10/6/2016. At 87 years of age, Jack Bogle still has plenty of things to say about investing and life. The man most responsible for widespread adoption of passive investment strategies makes particularly salient points at a time when active managers are increasingly under siege for poor performance relative to passive benchmarks.

It Starts With a Single App – The Economist, 10/1/2016. Many of us are familiar with using Uber, Airbnb, and other elements of the “sharing economy”. However, there’s still plenty of room for innovation, especially when it comes to urban transportation. The Economist provides a preview of the type of transportation services we might see in the future that seamlessly integrate various sharing services and public infrastructure. As the world becomes increasingly urban, such solutions will become necessary to avoid gridlock.

So I Bought an Electric Car – Mr. Money Mustache, 10/6/2016. The author of this well known personal finance blog describes his (out of character) purchase of a brand new Nissan Leaf. The massive incentives offered by governments on electric car purchases could make such a purchase attractive for many normally frugal consumers who would otherwise forego car ownership entirely or opt for used vehicles.

The History of the Town Hall Debate – Smithsonian Magazine, 10/6/2016. As voters anticipate the upcoming town hall presidential debate between Donald Trump and Hillary Clinton on October 9, this article describes how the format is not new in America even though it is viewed as relatively innovative at the presidential level.

Tom Brokaw: Learning to Live With Cancer – New York Times, 10/1/2016. Three years ago, at age 73, Tom Brokaw was diagnosed with incurable multiple myeloma. With his cancer now in remission, Mr. Brokaw reflects on his experiences and adjustments he has had to make personally and professionally.

Unfortunately, the reality is not quite so simple. The fact that a market may be statistically cheap is not, by itself, a sufficient condition to realize market beating returns over time. Investors involved in the Japanese market in recent years can attest to this harsh reality. However, it is very likely that significant opportunities exist in Japan despite the many macroeconomic and corporate governance concerns cited as the usual reasons for statistical cheapness. How should investors go about identifying promising companies in Japan while avoiding value traps?

ValueConferences is currently offering a 50% discount for the Japan Investing Summit 2012 which will take place on November 7 and 8. The conference is fully online which means that attendees can avoid the costs and hassles associated with conference travel. Better yet, the discounted registration fee is only $297 through October 26. The Japan Investing Summit is organized by same company that produces the widely acclaimed Manual of Ideas, a monthly publication specializing in bringing value-oriented investment ideas to sophisticated investors. The conference will feature more than twenty of the world’s most successful investors including:

• Mohnish Pabrai, Managing Partner of Pabrai Investment Funds

• Shuhei Abe, CEO, SPARX Group

• David Baran, CEO, Symphony Financial Partners

• Joshua Kennedy, Managing Partner, Sonian Capital Management

• Alexander Kinmont, CEO, Milestone Asset Management

• Tim McElvaine, President, McElvaine Investment Management

• John Lambert, Investment Manager, GAM

• Robert Macrae, CEO, Arcus Investment

• Noriyuki Morimoto, CEO, HC Asset Management

• Mark O’Friel, Managing Partner, MOF Capital

• And many more …

In addition to the conference content, attendees are provided with a number of bonus features including a 100+ page conference issue of The Manual of Ideas. We encourage readers to learn more about the conference by clicking on one of the links above.

Disclosure: The Rational Walk receives a referral fee for registrations originating from this site.

Investors will soon have the opportunity to learn from and meet Charles de Vaulx at European Investing Summit 2012, the largest fully online investment conference.

In his keynote address, Charles will share his time-tested approach, explain the processes that have enabled him to navigate past crises, and provide guidance on how investors can avoid the pitfalls of the eurocrisis and position their portfolios to preserve and grow purchasing power. You’ll benefit from exclusive insights by one of the greats in the investment business and have the ability to ask live questions of this legendary investor.

Exclusive Interview Excerpts

The following never-before released excerpts are from an exclusive interview with Charles de Vaulx. The interview, conducted by The Manual of Ideas and Value Conferences, highlights many important aspects of Mr. de Vaulx’s “eclectic” investment style. To hear more from Charles de Vaulx and other great investors, secure your spot at European Investing Summit 2012 today at a 40% special discount that expires on Friday, September 28.

Q: You describe your investing approach as cautious and opportunistic. How is that reflected in security selection and overall portfolio construction?

A: Well, I think I’ll try to answer your question in a sense of how that cautious and optimistic approach is reflected today, as we speak, in the overall portfolio construction of our funds and the way we pick stocks.

I think that our portfolio today is truly eclectic and multi-cap. Of course, if you look at the top ten holdings you’ll find mid-cap or larger cap stocks. But if you look at our holdings in Asia, where statistically today the small cap stocks are much cheaper than the large cap stocks, you will find a wide array of stocks. We also hold some mega-cap stocks: Total [TOT], I don’t know if Berkshire Hathaway [BRK] qualifies as one (probably) as well as tiny, little stocks in Japan, Korea or Switzerland. We own a billboard advertising company in Switzerland called Affichage [Swiss: AFFN], and it’s quite small.

You also see our cautious and opportunistic approach reflected in the fact that we own some bonds. In the IVA Worldwide Fund here in the U.S., we have a little less than 9% in high-yield corporate bonds, mostly a residual from a lot of bonds we were buying late ’08-’09. So, as a result, many of these bonds will be maturing shortly in the next year or two or three or four. So it’s short-duration, high-yield corporates. The yield is not huge. Today, we’re talking about 4%, but these are what we deem extremely safe instruments and because the duration is short, there’s no interest rate risk there.

You also will notice the eclectic nature by the fact that we have some sovereign debt, and it’s approximately 5.1% of the portfolio. It’s mostly short-dated government debt from Singapore. The coupons, the yields, are de minimis. Here the attempt on our part is to hopefully get an equity-type return out of the underlying currency. The hope is that the Singapore dollar will keep appreciating over time and, of course, in two years from now when those bonds mature the idea is to just roll them over and buy new similar short-dated bonds and to remain exposed to the Singapore dollar. Because that country doesn’t have much of a fiscal deficit, there’s not much of a long-dated government bond market to begin with.

You’ll see the eclectic nature by the fact that we hold some gold in the portfolio, both bullion and gold-mining shares. I am happy to have convinced Jean-Marie Eveillard in late 2001 that gold-mining shares were so obscenely expensive, overpriced, that if we wanted exposure to gold we had to modify our prospectus to give ourselves the right to hold gold bullion. It’s been a great move! We own a few gold mining shares, but it’s really de minimis and only in our U.S. registered mutual funds. Our preference remains, by far, towards holding gold bullion.

You’ll notice that at the end of June [2012] we had 12.4% in cash. In some ways you may want to view those short-dated, Singapore dollar bonds as quasi cash in Singapore dollars. The fact that we’re not fully invested tells you that we are worried that we think that, by and large, stocks are not dirt cheap enough to be fully invested.

If you look at the kinds of names we own in stocks or at least if you look at the top-ten holdings, you’ll notice that the balance sheets of the companies we own are very strong. We are very fond of the expression Marty Whitman coined a while back, which is that it’s not enough for a stock to be cheap, it also has to be safe – “safe and cheap”. Safety starts with the balance sheet.

The cautiousness of the portfolio is expressed by the fact that we are making some negative bets. We have virtually no financials except for a few insurance brokers, except for – and we may talk about it later – some tiny positions in Goldman Sachs [GS], UBS [UBS]. Financials in the U.S. are slightly too expensive and in Europe we think that most banks remain grossly undercapitalized.

Another negative bet you’ll notice is that, other than a few stocks in South Korea, we have virtually no exposure to emerging markets. We have no direct exposure to the BRICs – Brazil, Russia, India and China – because even though these stocks have come down a lot last year and some of them this year, we believe that these stocks are dead. We are cautious and worried about what’s going on in China. We believe that a soft landing is in the cards, and hopefully that will not become a hard landing. Any sharp slowdown in China will have major consequences for commodity prices, which in turn will hurt many emerging countries.

Some specific countries like India have obvious issues with inflation and current account deficits, not to mention problems with their electricity. We’ve seen in Brazil over the past year-and-a-half how government intervention has had the ability to hurt investors. Investors in Petrobras [Sao Paolo: PETR] have seen President Rousseff, basically ask the company to think more about what’s good for Brazil Inc. as opposed to doing what’s right for the company’s shareholders.

Also, we worry about what’s going on in Europe. We’re not sure what the outcome will be. It’s a big unknown and the way we express our skepticism towards what’s happening in Europe is by being 65% hedged on the euro. We are willing to hold quite a few European stocks because we believe that many of them are multinational and not necessarily that Euro-centric.

Conversely, let’s not forget that quite a few American companies have a lot of their revenues in Europe. Also, even in the instances when some of our European stocks are quite Euro-centric in terms of where their business is conducted, we think that some of these businesses may not be as cyclical as others, or if they are, the price of the stock may already reflect that it’s going to be a difficult economic environment for a long time in Europe. So, in other words, there are many stocks in Europe where we think the bleakness of what’s going on has already been priced in.

Q: You state that you seek investments in companies of any size that typically have one or more of the following characteristics – financial strength, temporarily depressed earnings, or entrenched franchises. What are some examples of these temporary challenges, temporary depressed earnings for otherwise financially strong and entrenched businesses?

A: I’ll give you an example from the past and a more recent example. I remember in the late ‘90s we bought McDonald’s [MCD], the fast food company. Why? Because we were impressed by how global they were, much more global than some of their competitors. We also, early on, understood what Bill Ackman saw a few years later, which is the real estate angle, the fact that they own so much real estate, a lot of it they rent out to franchisees. Addressing your question of temporary challenges, the reason why that stock became so cheap back then is that the company was suffering because the food had become very bad — much worse than the competitors. And the service — there were many complaints about the quality of the service.

We felt that those two issues were fixable. Once those issues were recognized by top management, they were eventually able to fix them and the stock over time has gone up extensively. A more recent example would be was last summer, News Corp. [NWSA], Murdoch’s media company. They had the scandal associated with their tabloids in the UK. The stock came down and, yet, we were comfortable building a decent-sized position. The company had a very strong balance sheet, so we thought that they could suffer having to pay some fines. With hindsight, the balance sheet was so strong that, in fact, the company has been very aggressive buying back their own shares since then. On a sum of the parts basis, a year ago, the stock fell as low as $15 or $16. We had, on a sum of the parts basis, a value of around $30.

News Corp. is a very different company than it was 20 years ago. News Corp. almost went bankrupt in the early ‘90s and at the time it was mostly newspapers, magazines, but today’s businesses, BSkyB, Fox, there’s very little print, in the sense of being threatened by the Internet. These are very powerful businesses— one of the businesses is 20th Century Fox, which is a decent business, so pretty un-cyclical businesses with no major immediate sort of threat to their businesses – high margin businesses, a very strong balance sheet.

The way we interpreted the scandal is, we thought it had a silver lining because via some super-voting structure, Murdoch controls the company. We thought that the scandal – because it’s such a public business– he would be forced to improve corporate governance, which I think he has. We felt the Chief Executive Officer, Mr. Carey, was very competent as was the predecessor, Mr. Chernin. We realized that the super-voting control allowed him to make some mistakes in the past, but small mistakes.

He lost a lot of money when he overpaid for Dow Jones, the publisher of The Wall Street Journal. He overpaid for MySpace, but in the grand scheme of things these were small deals and, conversely, to his credit as a media guy, he saw the changes that were happening in the newspaper industry and moved away from that over the years. Today, the stock is at over $24. I think that was a good example of what we thought was a temporary challenge and one that was limited to just one part of their empire.

One stock that we’ve bought over the past six, nine months is a French-based company called Teleperformance [Paris: RCF]. They run corporate call centers, and that’s a case where all of the earnings pretty much come from the United States. They’re very powerful in the U.S. In fact, for all practical purposes, the company should be headquartered and listed here. It’s sort of an accident that it is listed in France. The French founder happens to live in Miami, and it’s an interesting case where the French operations are losing a lot of money.

It’s much harder in France than in the U.S. to fire people and so they are not able to stop the bleeding right away in France, and I think we feel that we can quantify what those losses will be. Worst case, the company can hopefully shut down the business over time, and I think those losses in France mask the quality of their earnings in the U.S. Historically, there have been many instances where we have dabbled a lot in what we call high quality, yet, cyclical businesses.

If you think about temporary staffing companies – Randstad, Manpower; if you think about the freight forwarding companies – Kuehne + Nagel, Panalpina, Expeditors International… If you think about the advertising companies, billboard advertising, they are good businesses in the Warren Buffett sense of return on invested capital — service businesses, high returns on capital, high free cash flow. They are cyclical because, oftentimes, other investors have a shorter-term horizon than we do. Whenever the economy goes south, in the world or in the country, these stocks go down, sometimes excessively so, so that the stocks implicitly forget that there’s a prospect that it’s just a cyclical downturn, not a secular change in the business. So we’ve often been doing some of this in the past.

Q: When it comes to Europe, most of your investments there are in companies headquartered in France and Switzerland. Why not more in Germany or peripheral European countries?

A: Again, great question. Let me start with Germany. In the past, we have had quite a few investments in Germany. We used to own in the early 2000s, late 1990s-2000s, Buderus [formerly Frankfurt: BUD]. It was our largest holding. Buderus is a boiler manufacturer. We’ve owned shares such as Vossloh [XETRA: VOS], Axel Springer [XETRA: SPR], Hornbach [XETRA: HBH3], the DIY retailer and so forth, but the reality is that most companies in Germany are not listed. If you think about industry, industrial companies in Germany, they are not listed because they belong to what the Germans call the mittelstand. The mittelstand are those thousands and thousands of basically small and mid-size companies, many of which are family-owned, and these companies are not listed. All those great German industrial companies basically are not available in the stock market.

Now, among the companies in the stock market, many have been recognized as good companies and so the stocks are no longer cheap — if you think about some of the auto manufacturers like Volkswagen. So for the time being, we don’t have much in Germany, although we did buy, a month ago, a large industrial German company.

Switzerland is an interesting country where there are many quality companies. Even though we’re value-oriented, we start our process with trying to identify not so much cheap-looking stocks, but quality businesses. We like quality and then we hope and pray that somehow, one way or the other, we can get it for cheap.

Switzerland has so many great businesses, whether it’s Kuehne & Nagel [Swiss: KNIN], which is an even better freight forwarding company than Expeditors International here in America. Nestle is a wonderful food company, better in my mind than Kraft [KFT]. Geberit [Swiss: GEBN] makes great plumbing products. Lindt & Sprüngli [Swiss: LISN], as I’m sure you know, makes delicious chocolates, and so it’s our bias to its quality that oftentimes has led us to Switzerland. Adecco [Swiss: ADEN] is a leading temporary staffing company, has much higher margins than Manpower [MAN], has higher margins than Randstad [Amsterdam: RAND]. They just have top-notch companies in Switzerland, and sometimes we are lucky to get them cheaply.

France is an interesting country because even though France has had and today has those socialist tendencies, France has an amazing number of great businesses, which oftentimes are global leaders. Think of Pernod-Ricard [Paris: RI]. Pernod-Ricard started as a little family-controlled business in the south of France and through astute management and acquisitions they have become a leader in the sale of liquor competing very well against Diageo, which is best-in-class in that industry. Think about L’Oreal — what a wonderful, global consumer company. And of course everyone knows that France is the home of stocks such as LVMH and Hermes, the luxury good companies.

In France, we own Sodexo [Paris: SW] a food catering company. They compete against Compass [London: CPG] in the UK. Sodexo is a very well-run, global company. They have a huge subsidiary here in America, Marriott Services, which they acquired a long time ago.

There’s a stock we don’t own now but we’ve owned in the past. It’s become somewhat of a darling, Essilor [Paris: EI]. They are, by far, the leading company worldwide that manufacturers lenses for glasses. We’ve owned in the past Bureau Veritas. It’s a little bit like ISS [Group] in Switzerland. It’s an inspection service company and they have big market shares in many specific niches. It’s a service business, non-capital intensive. France has companies such as Legrand [Paris: LR]. Legrand is the leader worldwide in electrical switches.

France does have those global companies that are very good at what they do and, at the same time, many of these companies are family-controlled. We at IVA believe that more often than not family-controlled businesses do better than other types of business and could not agree more with Tom Russo from Gardner Russo & Gardner on that topic. One of his big themes is that he loves, for the same reason we do, family-controlled companies because they have a long term vision and often times do great things.

The final point I want to make about France, and it’s important from a protection of minority shareholders standpoint, is that France is a pretty good place to be a minority shareholder. When there are takeovers in places like Germany or Switzerland, not to mention Italy, you often, as a minority shareholder, can be abused.

In France, especially now, compared to 20 years ago, minority shareholders are well treated when there are squeeze-outs and takeovers. The protection of minority shareholders is pretty high in France. That’s important because it just so happens that quite a few of our companies, not by design, get taken over, and when that happens we want to be well protected.

If you look at places like Italy, there aren’t that many listed companies, sort of the same reason as Germany. All these companies, like industrial companies based in northern Italy, most of them are family-owned and not listed. So there’s not that much available in the stock market, and some of the other countries in Europe — Spain, Portugal, Austria — oftentimes the biggest stocks are just the big banks and insurance companies. Most of them are, especially on the banking side, grossly undercapitalized. They may look cheap, but they are certainly not safe. Again, not a lot of quality stocks are available in the Greek stock market, or the Portuguese or Spanish one.

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Disclosure: The Rational Walk receives a referral fee for European Investing Summit 2012 registrations originating from this site.

The Manual of Ideas recently interviewed Mr. Marks and has provided a 27-page transcript of the discussion. Readers interested in more information can view the 50 minute video and obtain the full transcript as one of 11 great bonuses immediately upon registering for the fully online European Investing Summit 2012.

Here are a few excerpts from the interview:

“The interesting thing about investing is what I call the perversity. The point is that it is so not intuitive. It is so not obvious — investing. A great example lies in the fact that, people think that to be a good investor, you have to understand companies. But the market has an understanding of companies, and if you understand the company the same as the market does, even if the market and you are right, you are not going to make any special profits.”

“…when my son comes to me, who is a budding hedge fund investor, he gives me an idea, a stock, macro trend, or something like that, the first question I always ask is the same: Who doesn’t know that? That is really the question. When you think you know something, the question is whether the market knows it too. And if it does, then your idea has no relative superiority.”

“…[investing] is really not a good business for people who don’t have some ego because you have to do the things that Dave Swensen describes as lonely and uncomfortable. I think it was [Jean-Marie] Eveillard who said it was warmer in the crowd, in the herd. But if you only hold popular positions, you can’t do better than average, by definition. And I think you will be very wrong at the extremes.”

“The greatest example is this: If you went to the horse races, would you always bet on the favorite? The favorite, assuming the crowd is intelligent, which usually it is, is the horse with the highest probability of winning. That doesn’t mean that the favorite is always the best bet. You might have another horse that has a lower probability of winning but the odds are so much higher, that’s the smart bet…”

“[U.S. Treasuries] are a safe investment in the sense that the outcome is known and not really subject to variation. I think they are not a good investment because the known outcome is an unattractive one. Today you can buy the ten-year [Treasury] and with no risk, lock up the certainty of 1.9% return for ten years. Is that really a good thing to lock up?”

“What the investor has to do is weigh out on the one hand price and on the other hand reality. Everybody thinks very dire thoughts about Europe and the Euro, and I would be the last person in the world to argue against that position. Then the next question is, European assets are lower in price because of the macro conditions, but are the macro conditions being viewed too pessimistically?”

“Tenet number three of our investment philosophy says we are active in less efficient markets only. We probably wouldn’t do a hedge fund for large-cap New York Stock Exchange firms because the tendencies are that those would be more efficient than others. But emerging markets, yes. Japan, yes.”

Disclosure: The Rational Walk receives a referral fee for European Investing Summit 2012 registrations originating from this site.

With chaos, however, often comes great opportunity for those who have done their work and are prepared to act. ValueConferences is currently offering a 50 percent discount on registrations for the European Investing Summit 2012 which is scheduled for October 9 and 10. Unlike most investment conferences requiring expensive registration fees and the costs and hassles of travel, the European Investing Summit is fully online and the discounted registration is only $297 for a limited time.

The European Investing Summit is organized by same company that produces the widely acclaimed Manual of Ideas, a monthly publication specializing in bringing value-oriented investment ideas to sophisticated investors. The conference will feature more than twenty of the world’s most successful investors including:

• Charles de Vaulx, Chief Investment Officer, International Value Advisers

• Guy Spier, Managing Partner, Aquamarine Capital

• Amit Wadhwaney, Portfolio Manager, Third Avenue Management

• Jochen Wermuth, Chief Investment Officer and Managing Partner, Wermuth Asset Management

• Frank Fischer, Chief Investment Officer, Shareholder Value Management

• Álvaro Guzmán de Lázaro Mateos, Managing Partner and Portfolio Manager, Bestinver

• And many more …

In addition to the conference session, attendees are provided with a number of bonus features and videos including exclusive insights from Jean-Marie Eveillard, Howard Marks, Tom Russo, and many others.

We encourage readers to learn more by clicking on one of the links above or on the banner below. Disclosure: The Rational Walk receives a referral fee for registrations originating from this site.

— Warren Buffett

The wide variety of investments held by successful value investors indicates that there are many different approaches that can yield excellent results over long periods of time. Hyperactivity and a search for instant validation may be exciting but such vices are the sworn enemies of investors seeking to achieve their long term goals. Success requires an inquisitive mind, reading widely, and acting in a judicious manner when presented with understandable opportunities with a margin of safety.

Thousands of “Pitches” — Where to Start?

When he was getting started in the 1950s, Warren Buffett was known for reading every page of the Standard & Poor’s stock manuals in search of opportunities. The modern day equivalent might be repeating this process using Value Line and there is much to be said for wide exposure to voluminous data. Each page of data in Value Line can be viewed as a “pitch”. Most pitches do not come anywhere close to qualifying for further research let alone a “swing” involving an allocation of capital. Often only one or two companies in a Value Line issue of 130-140 companies may spark an interest in pursuing further work.

There is no short cut that can replace in depth research and every investor should, at a minimum, read a company’s latest 10-K, proxy statement, and 10-Q filings. However, there are ways to increase the percentage of “pitches” that are interesting enough to justify further work. The value investing community may be small but seems to have an unusually large number of investors willing to exchange ideas via blog posts and discussion forums. At a relatively modest cost relative to the potential value of ideas, some investors share their best ideas exclusively with subscribers.

Ultimate Value Finder — Three Researched “Pitches” Each Month

We recently had the opportunity to review a new subscription based newsletter published by Mariusz Skonieczny, founder and president of Classic Value Investors. Mr. Skonieczny is the author of Why Are We So Clueless About the Stock Market? which we reviewed in 2009 as well as a useful e-book on understanding financial statements which we reviewed in 2010.

Ultimate Value Finder provides readers with three investment ideas each month. Based on the free sample issue and the inaugural January 2012 issue, it is clear that the ideas presented are well researched and presented in a clear and compelling manner. Most importantly, Mr. Skonieczny clearly takes a value oriented approach when selecting companies for the newsletter and bases his valuation on conservative assumptions. Most of the companies he has covered are not widely followed by analysts and have been misunderstood or simply ignored by the stock market.

Premier Exhibitions

One unique situation identified in the January issue involves a company that has received some attention in the value investing community over the past few years but has been largely ignored by the market until very recently. Premier Exhibitions (NASDAQ: PRXI) is in the business of presenting museum quality exhibitions of artifacts from the Titanic wreck as well as educational exhibits of preserved human body parts.

Premier Exhibitions has long held clear title to 2,000 artifacts from a 1987 exhibition but the status of 3,000 artifacts recovered after 1987 were in question until August 2011 when a U.S. District Court awarded a specie salvage award to Premier. In total, the artifacts have an appraised value well in excess of Premier’s market capitalization. However, certain limitations on the sale of exhibits intended to keep the artifacts together as a collection may have tempered the market’s enthusiasm and the court victory was largely ignored.

The January 2012 issue of Ultimate Value Finder presents research on Premier that goes beyond what one may have read about the company from other sources. Through a diligent review of company filings, clues were found that indicated that an auction of the Titanic artifacts may be imminent. On December 23, shortly before the close of trading on a slow day right before the Christmas holiday, Premier announced that it had hired an auction house to conduct a sale of the collection. The news did not trigger an immediate rise in Premier’s stock price. In a strange delayed reaction, the stock did not rise significantly until December 28, nearly two full trading days after the news was revealed. However, Mr. Skonieczny released the January issue on December 26 to allow his subscribers to investigate and potentially act on the opportunity.

Separating the Wheat from the Chaff

There is no shortcut to success in investing and we view most newsletters with skepticism — particularly those promising a “system” that is guaranteed to produce short term results. However, well researched ideas grounded in a value investing mindset have the potential to improve results by identifying companies worthy of additional research. Not every company in Ultimate Value Finder or any other newsletter will spark an interest in further research. However, with thirty-six ideas provided each year, it is more likely than not that at least a few companies will warrant further study and perhaps one of the opportunities may result in an actual investment. At the very least, one is likely to see more attractive “pitches” by reading Ultimate Value Finder which we enthusiastically recommend to our readers.

Disclosure: No position in Premier Exhibitions. The Rational Walk receives a review copy of the newsletter but does not receive commissions or other compensation for referrals.

In his forthcoming book, The Most Important Thing, scheduled for release in May, Mr. Marks expands on the themes he covered in the Columbia presentation and goes into much depth on the concept of “second-level thinking”. At the risk of oversimplifying the concept, second-level thinking essentially boils down to the ability to think in probabilistic terms about the set of outcomes that could occur rather than to make investment decisions based only on the investor’s notion of what the most likely outcome might be. Avoiding “single scenario investing” would have spared many investors much of the pain that was experienced during the financial crisis.

Based on an electronic review copy of the book obtained by The Rational Walk, we highly recommend that all investors obtain a copy in May and also consider attending the Value Investing Congress in Pasadena. Investors who are looking for a formulaic “cookbook” for how to achieve superior investment returns will not find what they are looking for in the book, but those who are seeking to improve their general thought process and approach will find much value.

Readers of The Rational Walk are eligible for a $300 discount for the Value Investing Congress in Pasadena on May 3 and 4. To qualify for the discount, please use the following link and be sure to specify Discount Code W11RW10 upon check out. The discount expires on April 14, 2011 at which time the price to register will increase. Disclosure: The Rational Walk receives a referral fee for registrations generated through the link.

Click on this link to register for the Value Investing Congress

Case for Core-Mark at 2009 Value Investing Congress

In October 2009, Mr. Ghazi presented the case for Core-Mark at the 5th annual Value Investing Congress in New York. According to the Value Investing Congress blog, the bullish case for Core-Mark was based on the following points:

• Second largest distributor to convenience stores
• $300 million market cap
• $30 million net debt
• Trading at 12 times est 2009 earnings, 8 times TTM earnings
• Admits that this is a low margin business with low ROC, but is well capitalized, difficult to replace, underfollowed
• Highly fragmented industry
• Cigarette sales account for 70% of revenue, but just 29% of gross profit
• Company moving toward providing more fresh foods, which have much higher margins. This should more than supplant potentially declining cigarette sales.
• Believes company may ultimately be worth $45-$50

Core-Mark closed at 29.62 on October 22, 2009, the day of the presentation, and currently trades around $34.05 with a fifty-two week high of $37.19 over the past year. Based on Hawkshaw’s latest 13F, discussed below, Core-Mark is not currently part of the portfolio.

As an interesting aside, Core-Mark’s larger competitor is none other than McLane, the Berkshire Hathaway subsidiary. While we are not familiar with Core-Mark, we can underscore the fact that this type of business is very low margin. McLane typically has net margins near the 1 percent level. A Morningstar analysis of Core-Mark published last year claims that Core-Mark may have important advantages over McLane particularly in the distribution of fresh foods. We cover McLane’s activities as part of our recently released report on Berkshire Hathaway: In Search of the Buffett Premium.

Hawkshaw Portfolio at December 31, 2010

According to Hawkshaw’s latest 13F filing, listing positions owned as of December 31, 2010, Mr. Ghazi runs a concentrated portfolio with the top ten holdings accounting for 76.3 percent of the $147.9 million portfolio. Top positions include Symantec, Electronic Arts, Dell, Corporate Executive Board, and Abercrombie & Fitch. The portfolio also includes a put option on the S&P 500 index, accounting for 2.3 percent of the portfolio and probably intended to hedge the portfolio positions against a general decline in the market.

The exhibit below lists all positions Hawkshaw reported in the latest 13F:

The following chart displays the top ten holdings visually:

Readers of The Rational Walk are eligible for a $1,400 discount for the Value Investing Congress in Pasadena on May 3 and 4. To qualify for the discount, please use the following link and be sure to specify Discount Code W11RW7 upon check out. The discount expires on March 15, 2011 at which time the price to register will go up by $900. Disclosure: The Rational Walk receives a referral fee for registrations generated through the link.

Click on this link to register for the Value Investing Congress

Many of you may have read about Google’s recent decision to modify its search algorithms to supposedly reward original content sources and punish “content farms”. Google’s stated objective is to differentiate between “content farms” and sites offering “original content and information such as research, in-depth reports, thoughtful analysis, and so on,” according to Google’s principal engineer Matt Cutts.

One important question involves how Google’s algorithm identifies “original” content versus syndicated content. For example, how would Google’s algorithm know that an article on The Rational Walk is the original and an article on Seeking Alpha is syndicated? Google closely guards their algorithms and, while there has been much discussion among search engine optimization experts regarding tweaks that could address the latest changes, the facts are clear for The Rational Walk over the past week: Traffic, when adjusted for the Berkshire report release spike, is down significantly from prior levels.

Ultimately, it is our goal to spend time researching companies and developing original content rather than to worry about search engine optimization matters. For some time, we have been disillusioned with the value proposition offered by syndication of content in general and Google’s algorithm change has prompted serious reconsideration of the overall practice. Going forward, all content will appear exclusively on The Rational Walk and nowhere else and the chips will fall where they may when it comes to search engine results.

The impact on readers is that if you subscribe to RSS feeds on Seeking Alpha or elsewhere in order to read Rational Walk content, you will need to modify your RSS feed to utilize of our free subscription options. Those who are already subscribing to one of these options or read articles directly on The Rational Walk website will experience no changes.

Thank you for your continued interest in The Rational Walk.

Tuesday’s earthquake was officially an aftershock of a 7.1 magnitude earthquake on September 4, 2010 which caused property damage but did not result in any fatalities. Many of the buildings destroyed in Tuesday’s aftershock were initially damaged in the earlier quake. This has led to some debate over whether the two quakes will be considered separate insured events which can be important in cases where primary insurers obtained reinsurance. If this week’s quake is considered to be part of the same event that led to September’s larger quake, reinsurance may cover more of the damages.

One important question involves whether the disaster will lead to a harder pricing environment going forward. Insurers have been mired in a soft pricing market for several years with no apparent end in sight. According to several industry experts, the pricing environment is unlikely to harden based on a $12 billion event. Even a $50 billion event may only “give the market pause” for a year or so. What could result in a harder market? According to the quoted industry participants, only a large earthquake in a larger city or a major terrorist event is likely to have a lasting impact.

Berkshire Hathaway will release 2010 earnings tomorrow and it will be interesting to see whether any “subsequent event” disclosures are included in the 10-K related to this week’s earthquake. In Berkshire’s Q3 2010 report, the company indicated that General Re incurred $304 million of catastrophe losses primarily due to the Chilean and New Zealand quakes and storm related losses in Europe, Australia, and New England. If this week’s event in New Zealand is material enough for Berkshire, we may expect to see some information regarding anticipated losses in the 10-K.

Disclosure: Long Berkshire Hathaway.

Rahul Saraogi, Managing Director at Atyant Capital, will make a presentation at the 6th annual Value Investing Congress West in Pasadena on May 3 and 4. According to the Congress web site, Mr. Saraogi currently manages the Atyant Capital India Fund and has focused exclusively on the Indian markets over the past ten years. It appears that his investment style leans toward concentration since his goal is to identify the best ten to fifteen opportunities from the thousands of publicly traded Indian corporations.

Trillion Dollar Opportunity

In a recent interview with the Value Investing Letter (free registration required), Mr. Saraogi comments on India’s pitiful infrastructure which has impeded economic growth in recent years. Although the inadequate infrastructure is a major issue, the need to make upgrades can also be viewed as an opportunity for investors:

India’s inadequate infrastructure I think is actually a huge opportunity. India needs to invest 1 trillion dollars over the next 5 years in infrastructure just to meet present demand. India’s infrastructure trajectory will be very different from China’s. Most of China’s infrastructure has been government directed and built either directly by the government or government owned companies. India has realized that the government is incapable of building anything (thankfully so). Infrastructure in India will be built only using a public-private partnership model. In some sectors like telecom, airports and power, the model has been tested and has either taken off or is in the process of taking off. In some others like ports, roads, railways and urban transportation, the models are evolving and have had moderate success. The problem for some time will remain in sectors like water, sanitation, waste management and urban infrastructure where all models have failed. Unfortunately these are the sectors that most glaringly showcase India in a poor light to visiting foreigners.

With an economy that has averaged 8 percent growth in real GDP over the past decade and has a population of 1.2 billion with half under the age of 25, the market opportunities seem clear for companies that can navigate the Indian bureaucracy and investors agile enough to pick the winners and losers. While the local knowledge required in Indian markets probably rules out most companies for all but the most skilled investors, it may be interesting to explore the opportunities further at Mr. Saraogi’s upcoming presentation.

Readers of The Rational Walk are eligible for a $1,550 discount for the Value Investing Congress in Pasadena on May 3 and 4. To qualify for the discount, please use the following link and be sure to specify Discount Code W11RW5 upon check out. The discount expires on February 17, 2011. Disclosure: The Rational Walk receives a referral fee for registrations generated through the link.

Click on this link to register for the Value Investing Congress