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Good Reading -- July 2015


"Economic and company fundamentals in the U.S. are fine today, and asset prices -- while full -- don't seem to be at bubble levels. But when undemanding capital markets and a low level of risk aversion combine to encourage investors to engage in risky practices, something usually goes wrong eventually. Although I have no idea what could make the day of reckoning come sooner rather than later, I don't think it's too early to take today's carefree market conditions into consideration. What I do know is that those conditions are creating a degree of risk for which there is no commensurate risk premium. We have to behave accordingly." -- Howard Marks, June 8, 2015 in Risk Revisited Again

Facts and Figures

Source: Mary Meeker (of dotcom fame/infamy) and KPCB in a long, data-packed presentation full of interesting figures on internet/technology and a range of other topics

  • In 1995, roughly 0.6% of the world's population used the internet; in 2014 it was roughly 39%. Recent growth in internet usage has slowed to ~8% per year.

  • Mobile phone penetration from 1995-2014 has gone from 1% to 73%.

  • Time spent per adult user in the USA has been roughly flat since 2008 for desktops/laptops but has skyrocketed on mobile (now more than half the total).

  • At the end of 1995, the world's top 15 internet companies had a combined market cap of roughly $17 billion. As of May 2015 that figure was $2.4 trillion. The only company on both lists is Apple.


  • Physics of the Future: How Science Will Shape Human Destiny and Our Daily Lives by the Year 2100 -- This book is a couple of years old but I just came across it (thanks to Ben for the recommendation!). The author is a physics professor and he's written a really interesting book.

  • The Great Minds of Investing -- This new book looks at 33 successful investors through a series of portraits and profiles. I haven't read it yet, but it appears to be more of a collection of vignettes and photographs than a set of comprehensive biographies, and analysis of the investors is very light. See below for an excerpt that caught my attention featuring Jean-Marie Eveillard, Francis Chou, and Bill Miller. Another excerpt is here.


  • The Phillips Conversations -- A fantastic collection of interviews from Scott Phillips, Templeton Press, and The Manual of Ideas.

  • "Billionaire Rales Brothers Ready for New Act in Split of Danaher" -- Some great history and some astounding numbers in this article.

  • Berkshire Beyond Buffett lecture -- Following up on last month's link, this is a lecture by Professor Lawrence Cunningham.

  • How much do skyscrapers actually move? -- A look at the engineering realities versus the human perceptions of skyscrapers swaying in the wind. The engineering math is interesting, especially in light of what engineers could design as compared what's economically viable and what people want (or how they have to "solve for people" and the human considerations that go into building designs).

  • The Best and Worst Airlines, Airports and Flights -- Interesting and useful stuff from a great site.

  • 1974 and 1999: History Turned Upside Down -- A look back from the archives of Jason Zweig.

  • A Partnership with China to Avoid World War -- I agree with Hank Paulson, Charlie Munger, and here, George Soros, who've all said that forging deeper, mutually-beneficial ties to China should be at the top of the list of our geopolitical priorities.

  • The Greatest Good -- This fascinating article looks at a data-driven hunt for the world's best charity (specifically the most efficient way to save a life), and none other than Bill Gates tweeted his endorsement of it.

  • More Gates: a video interview discussing climate, taxes, and Microsoft.


  • In Defense of Stock Buybacks -- The debate over buybacks continues to escalate, reaching ever higher levels of craziness. Buybacks are either a good use of capital or not, as Roger Lowenstein discusses here with a much needed dose of logic and reason. The opposing view -- "Ban the Stock Buyback Binge," which may well be the dumbest thing ever written -- is here.

  • More from Lowenstein, this time on trade and Trans-Pacific Partnership specifically.

In defense of stock buybacks

By Roger Lowenstein JUNE 15, 2015

STOCK BUYBACKS are suddenly controversial, with critics arguing that they are hurting the American economy, killing jobs, and manipulating stock prices and therefore must be banned. Bernie Sanders, the Vermont senator running for president, has made slamming buybacks a theme of his campaign. And William Lazonick, an economics professor at UMass Lowell, has asserted that banning buybacks is key to reviving the middle class.

Is this ordinary corporate tactic really so bad? Actually, buybacks are both useful and benign — and in no way warrant restriction. Let’s start with the basics: stock buybacks are a converse operation to stock sales. Companies issue stock — that is, they sell slices of equity — to raise capital. They buy back stock to retire capital. These buybacks occur for two reasons.

Sometimes, a firm accumulates more capital than its business can profitably employ. Believe it or not, overcapitalization can be just as harmful as undercapitalization. Companies with an overabundance of capital tend to do stupid things. They become lazy about operating efficiently, or build a vanity headquarters, or make a foolish acquisition. Such pursuits may make the CEO feel important, but (often) they waste the shareholders’ capital. Retiring excess capital is smart business.

The other common reason for repurchasing shares is that executives believe their stock is cheap — and indeed, cheaper than possible alternatives. This is not “manipulating” the stock. As with an investment you make in your 401(k), buybacks will pay off if — and only if — the executives’ calculation about value is correct. Suppose you had a 50-50 partner in a private business worth $1 million; one day your partner, feeling gloomy, offers to sell his half for only $250,000. Buying him out would increase the value of your equity. In just that way, buybacks of inexpensive stock raise the value of the remaining shares.

If the executives are wrong, however, and the stock is overpriced, no amount of stock repurchases will raise the share price (except perhaps in the very short term). Indeed, with every overpriced share the company acquires it becomes that much poorer.

Decisions about selling and retiring stock are part of the process of “capital allocation,” one of the most important functions of the capitalist system. It is the market’s way of directing society’s capital where it is most productive.

There are many things the capitalist system cannot do well — or doesn’t do at all. There is no market mechanism for restricting pollution or for prohibiting monopolistic mergers or for setting a reasonable floor on wages. We need government for that. But allocating capital is far better done by the private sector. No government office can decide how much capital each firm should work with, or where it should be deployed — and none should try.

Protesters of corporations such as McDonald’s have charged that buybacks represent a “theft” from the employees. However, the capital that a McDonald’s uses in share buybacks isn’t diverted from employees any more than it is diverted from beef producers, or ketchup distributors, or any of the company’s other vendors. Capital belongs to the shareholders. McDonald’s has a fiduciary duty to employ that capital profitably, hopefully at competitive rates of return. Lazonick has written that the idea that profits belong to shareholders “is true only according to an ideology that defies common sense.” I would like to see him devise a system in which investors put up capital without being entitled to the profits.

Roger Lowenstein is a writer in Newton. His next book, “America’s Bank: The Epic Struggle to Create the Federal Reserve,’’ will be published in October.

The World’s Best Investors

An excerpt from William Green’s The Great Minds of Investing, which uses profiles to explore what leads to enduring investment success.


May 30, 2015

What does it take to achieve enduring success as an investor? A dazzling intellect may help, but it’s useless without the right temperament. In my interviews with many renowned investors, I’ve found that they typically share several indispensable traits, including the independence of mind to go against the crowd, extreme patience and discipline, and extraordinary emotional fortitude.

These winning qualities appear in abundance in The Great Minds of Investing, a new book on which I collaborated with the photographer Michael O’Brien. The three profiles excerpted here tell the stories of Jean-Marie Eveillard, Francis Chou, and Bill Miller, who have each defied gravity by beating the market over decades. Still, success hasn’t come easy. Miller and Eveillard both suffered excruciating periods of underperformance that almost wrecked their careers. As hedge fund manager Mohnish Pabrai (also profiled in this book) told me, great investors must possess one invaluable characteristic: “the ability to take pain.” --William Green


In the late 1990s, Jean-Marie Eveillard faced the investing equivalent of a near-death experience. Amid the insanity of the dotcom bubble, he refused to buy any of the overvalued tech, telecom, or media stocks that were enriching more carefree investors. His most prominent mutual funds, SoGen International and SoGen Overseas, lagged the market disastrously for three years running. “After one year, your shareholders are upset,” he says. “After two years, they’re furious. After three years, they’re gone.” By early 2000, 70 percent of SoGen International’s shareholders had dumped the fund and SoGen’s overall assets had fallen from more than $6 billion to barely $2 billion.

Jean-Marie Eveillard Photograph: Michael O’Brien

Value investing “works over time,” says Eveillard, but he had always known that he would suffer from periods of underperformance. Still, he’d never experienced this sustained misery. “You do, in truth, start doubting yourself. Everybody seems to see the light. How come I don’t see it?” As his years in the wilderness dragged on, “there were days when I thought I was an idiot.”

Others agreed. Even his funds’ own board members turned against him, wondering why he had failed to embrace the new paradigm of instant, tech-fueled riches. One executive at his parent company, Société Générale, muttered that Eveillard was “half senile.” At the time, he was only 59. Eveillard thought he might be fired. Instead, the French bank sold his investment operation to Arnhold and S. Bleichroeder for about “5 percent of what it’s worth today.”

And then the bubble burst. The Nasdaq index plunged by 78 percent, devastating legions of reckless speculators. Eveillard’s perennially cautious, value-driven approach was vindicated, and Morningstar later gave him its inaugural Fund Manager Lifetime Achievement Award. His renamed firm, First Eagle Funds, rebounded so strongly that its assets have ballooned to almost $100 billion. Eveillard retired as a fund manager in 2009, but he remains a senior adviser at First Eagle Investment Management. At 75, he retains his reputation as one of the enduring giants of international investing.

In retrospect, Eveillard says his feat of trouncing the indexes over three decades was “due largely to what I did not own.” In 1988, when fad-chasing investors were besotted with Japan, he sold the last of his Japanese stocks, unable to find a single company cheap enough to meet his standards. As a result, he emerged unscathed when the world’s second-largest market imploded. Likewise, two decades later, he steered clear of financial stocks before the 2008 credit crisis.

This ability to avoid market mayhem grew directly out of his discovery of Benjamin Graham’s The Intelligent Investor in 1968, shortly after he left France to work for Société Générale in Manhattan. The greatest lesson was that “you have to be humble because the future is uncertain,” says Eveillard. “Most people refuse to accept that.” For him, this meant buying cheap stocks that provided a significant margin of safety, then protecting himself further by diversifying broadly. Temperamentally, he wouldn’t dare to own a concentrated portfolio, because he was “too worried that it could just blow up” and was “too skeptical about my own skills.” Few professional investors so frequently utter the words “I don’t know.”

Indeed, Eveillard exudes an air of worry and self-doubt. He suspects that these traits stem in part from the challenges of his childhood as the oldest of five brothers. “I think parents are toughest with the oldest child,” he says. “Once, my mother told me, ‘You found the only occupation where you could be reasonably successful.’ ”

After settling in New York, Eveillard was surprised to learn that various American friends saw psychoanalysts. One of them explained that it was because he wasn’t happy every day. Eveillard was mystified. His thinking was strongly influenced, both then and now, by the sermons he had heard as a Catholic boy in the early 1950s. The priest in his grandmother’s village church preached that life on this earth “is a valley of tears and you can be happy only in the afterworld.” With this in mind, Eveillard says, “I would consider myself lucky if I’m happy on some days.”

Despite his achievements, Eveillard admits that he has often found his life “a bit difficult.” He’s hard on himself and unusually honest about his flaws and mistakes. Above all, he regrets that he didn’t do a better job of balancing work and family. Investing was so “absorbing”—and sometimes so “psychologically painful”—that he now realizes he didn’t focus sufficiently on his two daughters while they were growing up. His own parents “were not just self-absorbed but absorbed in each other,” he adds. “So the five of us did not get much attention from our parents.” To some degree, he “did the same thing” with his own children. Then again, he says, “to be professionally successful, it seems to me, requires a lot of attention.”

When I ask if he would have been a less successful investor if he had paid more attention to his family, Eveillard replies: “I don’t know, and I’ll never know.” He pauses, then adds: “I think the Catholic priest was right. Life is not simple.”


When Francis Chou emigrated from India to Canada at the age of 20, he had about $200 to his name. Within a few months, he landed a job as an electrician with Bell Canada in Toronto. He worked there for seven years, spending his days climbing ladders and soldering wires. During that time, he chanced upon a magazine article about value investing. He knew immediately that this was his calling. “You just have to find bargains,” he says, “and I felt that I could easily do that.”

Francis Chou Photograph: Michael O’Brien

This conviction grew out of his experience as a child in the Indian city of Allahabad. His father, a university professor who originally came from China, died when Chou was seven. With five children to raise on her own, Chou’s mother needed help. So Chou handled the family’s shopping, haggling in the markets of Allahabad throughout his childhood. “You needed to go to several shops to see what they’re selling and how they’re pricing it,” he recalls. “If something is expensive, you can always buy a substitute that’s cheaper. The stock market is precisely the same. There are more than 20,000 companies. So, if something is expensive, you just go to the next one….You’re always looking for alternatives.”

An avid reader, Chou taught himself to invest by mastering Benjamin Graham’s teachings. “Basically, the cheaper you buy anything relative to what it’s worth, the better your results would be,” he says. “That was the criterion. Anything else was just poison.” The fact that he hadn’t gone to college didn’t strike him as an impediment: “A lot of educated people don’t know how to look at bargains. They have their own biases and cannot compete….They give in to peer pressure. They give in to trends. They don’t understand their own psychology and how other people have influenced them.”

In 1981, Chou persuaded six colleagues at Bell Canada to pool their money with him, so he could start shopping for bargain stocks. Between them, they scraped together about $50,000. “I knew I was going to be successful as a money manager. There was no doubt about that,” he says. “You need to have a lot of confidence in yourself that you can compete. Otherwise, you’ll get crushed because you have a foreign accent and people look down on you because you only have a 12th-grade education.” Without that “inner confidence,” he says, “you can’t get out of the gutter.”

In 1986, he turned this private investment club into the Chou Associates Fund, a publicly available mutual fund. It has generated returns of 11.8 percent a year over nearly three decades, handily outstripping the indexes, despite his tendency to hold a large cushion of cash. Along the way, he has won many accolades, including a 2004 Morningstar Canada award for the Fund Manager of the Decade.

Chou, who is now 59, has since added six other mutual funds that invest in everything from European equities to junk bonds. Still, he continues to work entirely alone, except for one assistant. His approach to managing his investment business is decidedly idiosyncratic. He has no interest in marketing. And he has rebated his fees on several occasions when he felt that he didn’t deserve to be paid, because he had “performed badly.”

Even by the standards of other top-notch value investors, Chou possesses extraordinary levels of patience and self-restraint. “Over 30 years, there have been a lot of temptations”—from booming energy stocks in the 1980s to hot tech stocks in the 1990s to overpriced banking and housing stocks before the credit crisis. He has avoided such “potholes” by focusing dispassionately on valuation and by remaining emotionally detached from the markets. “It’s better to be an outsider and just watch the fun,” he says. “If you want to participate in the market all the time, then it’s a mug’s game and you’re going to lose. You only want to be a participant when the odds are in your favor.”

At the start of 2015, many of his peers are complacent after six consecutive years in which the market has risen. But Chou sees trouble ahead. When he started out in 1981, interest rates were high and stock valuations were low. Today, he says, that situation has reversed, which is “setting you up for failure.” He’s finding so few bargains that Chou Associates has more than 30 percent of its assets in cash. He remarks: “If I have to go to 100 percent cash, I’d be quite happy.”

In situations like this, “you need to maintain your discipline,” says Chou. “You cannot force the issue. You just have to be patient and then the bargains will come. In the meantime, you just read, update your knowledge, and study companies, even if you’re not going to buy them.”

Is it boring? “No,” he says. “If you enjoy reading, it’s not boring.” But how long can he sit passively on the sidelines, merely watching the game and buying nothing? “Oh,” says Chou, “I can wait 10 years. Even longer.”


Once upon a time, Bill Miller reigned supreme as the undisputed king of mutual fund managers. His flagship fund, Legg Mason Value Trust, famously beat the market for 15 consecutive years through 2005. Morningstar crowned him as its Fund Manager of the Decade and Barron’s included him in its “All-Century Investment Team.” By 2007, he oversaw more than $70 billion at Legg Mason, transforming the sleepy Baltimore firm into a financial powerhouse. Then, in one catastrophic year, everything came tumbling down.

Bill Miller Photograph: Michael O’Brien

When the financial crisis wreaked havoc in 2008, Miller was terribly exposed to some of the worst-hit areas of the market. Contrarian as ever, he continued to buy beaten-up financial stocks as they crashed, accentuating the damage to his portfolio. His holdings included toxic stocks such as AIG, Bear Stearns, Merrill Lynch, JPMorgan Chase, Freddie Mac, and Countrywide Financial. Legg Mason Value Trust plunged 55 percent in 2008, devastating his spectacular long-term record. His smaller fund, Legg Mason Opportunity Trust, fared even worse, falling 65 percent. Investors fled in droves, and Miller says his assets under management dropped by 90 percent from peak to trough.

His own finances took a beating, too. Before the crisis, he had gone through an amicable but expensive divorce. That had wiped out “half of my net worth,” he says, “and because I’m always on margin, I lost 80 percent of that half in the collapse.” Still, he was remarkably sanguine about these personal losses. The son of a taxi driver, he had grown up in a family “without any money….It was a treat on your birthday if you went to Burger King.” And, he says, “It’s not the end of the world if you’re not rich. Most people in the world aren’t rich. So that didn’t affect me.”

It was worse for many of his colleagues. More than 100 of them were laid off as his funds’ assets dwindled—a direct result of his own investment mistakes. “I wish I could blame someone else, but I can’t,” says Miller. “That was the worst part of it: losing money for clients, and people losing their jobs because I screwed up.” Racked by stress, he put on 40 pounds, thanks to a diet rich in cheeseburgers and Chinese food. “I wasn’t about to eat salmon and broccoli every night,” he jokes. “There’s only so much pain I can take, and I drew the line there.”

Yet what stands out most is Miller’s resilience in the face of adversity. As the market imploded, he didn’t hide in a corner, nursing his wounds. He gathered all of the cash he could muster—not least, by selling his yacht—and invested it in cheap stocks that have since surged, enriching him and a loyal minority of shareholders who stuck by him. Miller says it wasn’t hard to keep buying while so many others ran for cover: “I’m contrary in the sense that paper losses, quotational losses, just leave me to think there’s more opportunity.” After all, “lower prices mean higher future rates of return. They don’t mean higher risk.”

Part of what sustained him during that trial by fire was his passion for philosophy. Miller, who had studied the subject as a postgraduate at Johns Hopkins University, says he revisited the works of stoic philosophers such as Epictetus and Seneca during the credit crisis. He drew strength from their “general approach to misfortune. Basically, you can’t control what happens to you. You can control your attitude towards it.” He also took solace from Thoughts of a Philosophical Fighter Pilot, an extraordinary book by Vice Admiral James Stockdale, who was tortured as an American prisoner of war in Vietnam.

Sometimes, Miller, now 65, wishes he had listened to his ex-wife and retired at the pinnacle of his success. She wanted him to quit so they could travel the world. “That would have been a smart thing to do,” he concedes. But the truth is that he still relishes the investing game, even though he has ceded control of his biggest fund, Legg Mason Value Trust. Competitive as ever, he delights in the fact that Legg Mason Opportunity Trust, which he co-manages, has risen more than 100 percent in just two years. He also notes with pride that Value Trust beat the market over his 30-year tenure and that Opportunity Trust has beaten the market over his 15-year tenure—even including the brutal losses of 2008.

In any case, Miller is hardly alone. Over the course of a long career, even the most brilliant investors inevitably suffer periods of dire underperformance. Miller quotes one of his favorite lines from John Maynard Keynes, who lost a fortune in the Great Depression yet lived to fight another day: “I should say that it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity.” If so, then Bill Miller has done his duty.

The Great Minds of Investing is published by FinanzBuch Verlag. Price: $74.99.

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