Bud Lab & Scot Thompson - Value Investors

Here is an excellent series of two videos that explain a Buffett & Munger approach to value investing with some details of discounted cash flow valuation.

Mohamed El-Erian

My focal point of interest over the past month or two has been debt crisis, both European and US. My big fear is of disorder in the Euro-Zone, the chaos over what happened with the US debt ceiling came as a surprise to me. The back drop to all of this is that the world is changing [James Wolfensohn], [David Mayhew], [Terry Smith]. We have also, in the west, been simply living beyond our means. A huge burden of debt has been transfered from business to the state. Governments are in a position where it is hard to see how they can act as the bank of last resort, and so it goes on.

Mohamed El-Erian, the co CEO of PIMCO is one of the most straight forward commentators and analysts of the changing world - he refers to the change as the "New Normal". His opinion is that we are moving to a new status quo. The future will be different. For me as somebody learning about investment it is interesting and important. It is not enough to choose a "best of breed" company and buy it at an attractive valuation - you have to look forward to where, in the words of Charlie Munger; "the puck is going to be". A really simple example would be that however attractive the valuation I would be reluctant to invest in a newspaper business why? well really the time for newspapers looks to be passing. I would not invest in a UK defense company, leaving aside I find the product rather distasteful, living beyond our means something has got to give - the cuts here seem to me inevitable and progressive.

Returning back to the bigger picture I think that it is important to have an idea of where the world is going, what the long term markets are going to look like, who is going to be buying what. Look for, as Roger Montgomery, calls it A1 businesses with big picture, long term, legs. Then let the cook - for how long? I am looking for a hold period of 10-20 years.

Returning back from the bigger picture to where I started. Here is a video by Mohamed El-Erian, one of my all time favorite commentators. The video is something like 15 mins. It is well worth the time. My take anyway.

Lena Komileva

I had to watch this video a couple of times. Lena Komileva talks quite quickly, additionally she uses turns of phrase that I am not that used to - the best one I came across was "continuos re-pricing of risk", yep I get it but it takes a moment to get your head in the right place. In the way that all roads lead to Rome Lena is former chief economist of Tullet Perbon (Terry Smith is the CEO of Tullet Perbon)

Lena raises some important issues. Europe impacts global financial stability. Government bonds are held by banks around the world, now the solvency of these governments is in question, the assumption that the bonds were essentially risk free is in question. Currently the European Central Bank is acting as bank of last resort - buying bonds from governments in the eurozone that are under pressure. Politically the ECB has the same troubles as the EuroZone. Can this last, what happens next?

The banking system is only as healthy as the quality of its assets. If the quality of these assets change then you have a sick banking system. Banks hold a lot of government bonds (from around the world), what happens as the risk of these bonds is re-priced? Now here, for me, is the scary bit if the governments themselves are essentially insolvent who can "step up to the plate" who can act as the banker of last resort?

Lena also points out that the banks are more reluctant to lend to each other, this is worrying as this mirrors the troubles of the 2008 crisis, and of course that banking is global, none of these entities are isolated but all interrelated. My understanding is that as well as holding bonds the whole of the financial system is pinned together with 600 trillion of financial derivatives. My guess is that this was a part of what prompted the Fed to bail out financial institutions indiscriminately rather than concentrating on the healthy ones in the last financial crisis.

The video is great and Lena is clearly very sharp indeed.

Joel Greenblatt - Value Investor

I came across this interview that Joel Greenblatt gave to Forbes. Joel covers a number of different topics but talks amongst other things about trackers and indexing. A problem with indexing is that most indexes are market cap rated. This means that as bubbles form your tracker is naturally weighted towards the inflated (bubbling) stock. He suggests that a value weighted index, also a product offered by his company, is a better solution. The idea that this is a fundamantal problem with indexes was something that I first came across from Parag Parikh. Another observation from Joel is that the stock market is becoming ever more short term. This is something that benefits the Value Investor.

The interview is excellent. Here is the video.

If you prefer text a full copy of the text of the interview is published by Forbes here.

Jim Rogers - Interview

This is an excellent interview from Jim Rogers. Bloomberg don't allow embedding of videos so I have made do with a screenshot with a link you can click on.

Jim is always interesting to listen to - one of the things that I got from this interview is that the next six months to a year are priced in by the market so it is pretty pointless trying to invest according to the news. You can not respond quickly enough to have an edge - really you need to be there six months or a year in advance. This is where the market is. This is quite interesting because when there is real volatility that may be because something that is not expected is being priced in. The other thing that occurs to me is that this leads to an idea of the time horizon for value investing - you should be looking out there more than six months or a year.