Good article written by Bill Miller of Legg Mason Capital Management in the Financial Times on the opportunities available in US blue chip.
The public’s distaste for equities is palpable and understandable. Negative returns for 10 years in stocks while “riskless” Treasuries have soared, and right after one of the best six months Treasuries have had in the decade, is more than enough to convince folks that stocks are not good long-term investments.
Then there is the really long term. Long-term Treasuries, as measured by the Barclays Capital Long Term Treasury Bond total return index, have beaten equities as measured by the S&P 500 in the year to date, and in the 3-, 5-, 10-, 15-, and 20-year time frames. It’s a tie at 25 years. More than 20 years of superior returns over stocks in an asset guaranteed by the US government seems to be sufficient to drive a stake through the heart of the idea that you want stocks for the long term.
It’s a truism in capital markets that the best investments are those that have previously done worst, where expectations are low, demand is down, and prospects appear at best highly uncertain. In 1980, bonds had been through a 30-year bear market relative to stocks, inflation was soaring, yields were at historic highs, yet expected to go higher, and a long bull market in bonds was at hand.
The idea that US interest rates would be near all-time lows 30 years later would have been dismissed as ludicrous. The situation is now reversed, with stocks having underperformed bonds for decades.
The point here is simple: US large capitalisation stocks represent a once-in-a- lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951. I was one year old then, but did not have sufficient sentience to invest. I do now, and if you are reading this, so do you.
http://www.ft.com/cms/s/0/40d69234-b518-11df-9af8-00144feabdc0.html
Jeffrey W. Ubben is a Founder, Chief Executive Officer and the Chief Investment Officer of ValueAct Capital. Prior to founding ValueAct Capital in 2000, Mr. Ubben was a Managing Partner at Blum Capital Partners (“Blum”) for more than five years. Previously, Mr. Ubben spent eight years at Fidelity Investments where he managed the Fidelity Value Fund. The Fidelity Value Fund had $4.5bn when Ubben left.
The ValueAct Capital strategy: Changing companies from the inside.
In this white paper, James Montier, a member of the GMO Asset Allocation team, discusses the importance of dividends in investing.
As those who know me can attest, I’ve never worried about being fashionable. Not for me, the fads and fashions of this contemporary age. Indeed, I’m known affectionately to some of my colleagues as “the Amish,” for my shunning of the modern world. Touch-screen technology and person-less check-ins at airports haunt my nightmares. Perhaps I am just a man from a different time.
Given these predilections, it is little wonder that I often sit and stare at the farce that passes for modern day investment. The churn and burn of an 8-month average holding period is anathema to me. Call me old-fashioned, but I like to focus on the things that matter, both in life and in investing.To those who charge around in markets trying to guess the next quarter’s make-believe earnings number, the concept of dividends seems wholly irrelevant. However, to those with an attention span measured in longer than milliseconds – who are few and far between, to judge from today’s markets – dividends are a vital element of return.
http://www.scribd.com/doc/36376547/A-Man-From-a-Different-Time-James-Montier
Interview with Berkowitz from the Investment Newsletter of Columbia Business School.
BB: The management factor is important, but the ability of a company to intrinsically generate cash is probably more important. It is always nice to own a company that your idiot relative could run. Great managers have failed at lousy businesses, so really the nature of the business and its ability to generate reasonable amounts of free cash flow—even in stressful environments—in relationship to the price that you paid is the most important factor. Bad management or a bad person can really screwup a good company so the management factor has become more and more a part of how to kill a business. Once you ascertain the free cash flow of a company, one of the ways that you can try to kill a business is through poor capital allocation.
Francis Chou is largely considered the top mutual fund manager in Canada of the last 15 years. His recent letter offers his insights into the current investing environment and explains his thoughts behind buying warrants of US financials.
Well, starting in 2007, financial institutions went through a cataclysm. Directly or indirectly, almost all of them had to be bailed out by the U.S. government. Looking back at the crisis, this is what we have observed:
1) The U.S. government will not let major financial institutions fail.
2) The financial institutions that survive will be the ultimate beneficiaries of any recovery in the economy.
3) Interest rates will be kept at artificially low levels for the foreseeable future. The spreads between what the banks are paying for deposits and borrowings in the market (like FDIC insured), and what they can lend at is enormous. After being severely burned, they have tightened
their lending criteria and have been extremely cautious with their lending practices. In general, the quality of loans now being made are quite high and for the first time in many years, banks are being paid handsomely according to the risks they are taking.
4) Financial institutions in general are hoarding capital. This will provide them with ample cushion to absorb losses if a double dip recession were to occur.
5) The books of financial institutions were carefully examined by all kinds of government agencies, including regulators, before the government allowed them to repay the U.S. Treasury under the Troubled Asset Relief Program (TARP).
6) Most of the big banks are selling below 10 times their potential earning power in the future.
A rare interview with Bruce Berkowitz, Morningstar’s Portfolio Manager of the Decade, discussing his controversial investments in US financial institutions.
A good article from Richard Thaler, a professor of economics and behavioral finance at the University of Chicago, published in this weekend’s New York Times.
BUSINESSES in nearly every industry were caught off guard by the Great Recession. Few leaders in business — or government, for that matter — seem to have even considered the possibility that an economic downturn of this magnitude could happen.
What was wrong with their thinking? These decision-makers may have been betrayed by a flaw that has been documented in hundreds of studies: overconfidence.
Most of us think that we are “better than average” in most things. We are also “miscalibrated,” meaning that our sense of the probability of events doesn’t line up with reality. When we say we are sure about a certain fact, for example, we may well be right only half the time.
To see how it works, try this little quiz: Give two estimates of the diameter of the moon in miles — a high and a low one, so that there is about a 10 percent chance that the moon is bigger than the upper estimate and a 10 percent chance that it is smaller than the lower one. It is easy to be 100 percent sure by making your low guess zero and your high guess a trillion, so don’t cheat. Write down your answers before reading further.
href=”http://www.nytimes.com/2010/08/22/business/economy/22view.html?_r=2&emc=eta1″>
Michael Mauboussin is the Chief Investment Strategist at Legg Mason Capital Management. He has published an excellent paper on differentiating between luck and skill.
There’s a simple and elegant test of whether there is skill in an activity: ask whether you can lose on purpose. If you can’t lose on purpose, or if it’s really hard, luck likely dominates that activity. If it’s easy to lose on purpose, skill is more important.
In this report, we will discuss why unraveling skill and luck is so important, provide a framework for thinking about the contribution of skill and luck, offer some methods to help sort skill and luck in various domains, and define the key features of skill in the investment business.
Walter Schloss started his career in finance at the age of 18 as a runner on Wall Street in 1934. He then took investment courses taught by Ben Graham at the New York Stock Exchange Institute. In 1955, Schloss started up his own investment firm where he averaged a 15.3% compound return over the course of five decades, versus 10% for the S&P 500. I came across this old Barron’s interview from 1985 on a good value blog.
Good profile in Business without Borders on Canada’s own Brookfield Asset Management and its CEO, Bruce Flatt.
http://www.bwob.ca/industries/real-estate-industries/a-perfect-predator/
This focus on workmanlike deal-making makes Brookfield very much au courant. After two decades of celebrating brash mavericks and gamblers—dot-com dreamers, M&A tacticians, credit-addled empire builders—the zeitgeist, post-meltdown, has shifted toward those who play it safe. And Brookfield, a company run largely by accountants, was dull before dull was cool. Besides, the low profile is intentional, a kind of camouflage. The company’s fundamental strategy—buying expensive properties on the cheap—relies, after all, on others blowing their brains out by taking fliers, so it can come in to clean up the mess and cart off choice pieces from the carnage. Brookfield, in fact, is the quintessential example of what French social scientists Michel Villette and Catherine Vuillermot identified in a 2009 study as a key strategy of iconic companies: eschewing risk and stealthily positioning yourself to spot vulnerability in rivals, then pouncing when the moment is right.