Thursday, March 31, 2011

Buffett Successor List Gets Shorter -

Buffett Successor List Gets Shorter -
"The remaining list is believed to include Matthew Rose, 51 years old, head of Berkshire's Burlington Northern Santa Fe railroad, and Ajit Jain, 55 years old, who runs Berkshire's reinsurance operations.

Both men have been singled out by Mr. Buffett in recent years for delivering strong results, and both have proven their ability to run profitable operations in which billions of dollars are at stake."

UPDATE:  So why the sudden resignation?  Seems like something might have been a bit wrong at Berkshire.  From the NY Times' Dealbook

"Reading Warren E. Buffett’s letter announcing the resignation of David Sokol from Berkshire Hathaway brings to mind a movie scene in which a police officer yells amid a wild crowd, “There is nothing to see here! Move along.”

But there is something to see, and so the policeman’s protestations do nothing.
Mr. Sokol’s departure would be significant in and of itself, but of course there are the other facts that Mr. Buffett’s letter details. In December 2010 and January 2011, Mr. Sokol bought Lubrizol stock before the announcement of Berkshire Hathaway’s takeover of the company.
Mr. Sokol’s profit on the purchases appears to be about $3.1 million."
So while it may or may not have been illegal (Buffett says no, the SEC is considering the matter according to NY Times), it sure smells rotten and gives the impression that something was improper. 

That said, I can't help but feel sorry for whoever replaces Warren Buffett.  I just do not think anyone can live up to Buffett's record.  It will be like Todd Collins replacing Jim Kelly as the Bills QB.
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Wednesday, March 30, 2011

The future of education? How can we bring it into a college setting?

YouTube - Authors@Google: Salman Khan:
"Salman Khan spoke to Googlers in Mountain View, California on March 15, 2011 about Khan Academy: A World Class Education to Anyone, Anywhere.

Salman Khan is the founder and faculty of Khan Academy a not-for-profit educational organization. With the stated mission 'of providing a high quality education to anyone, anywhere', the Academy supplies a free online collection of over 2,000 videos on mathematics, history, finance, physics, chemistry, astronomy, and economics."

Here is their Video Lesson on PE ratios.

I guess I am not sure on the grading, but it is a really cool concept...and in a way what we are doing in SIMM.  For instance I do almost no lecturing in the class and people are at very different levelso sskill with the betetr people mentoring the others.
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Tuesday, March 29, 2011

Financial illiteracy hinders savings - Pittsburgh Tribune-Review

Financial illiteracy hinders savings - Pittsburgh Tribune-Review:

"A working paper just published by the National Bureau of Economic Research, on two explanations for why consumers have trouble with financial decisions.

'One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations, such as computing compound interest, which could cause them to make suboptimal financial decisions,' wrote Olivia Mitchell, the director of the Pension Research Council, and Justine Hastings, an economics professor at Yale University, in their paper, 'How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors.'

'A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs."

Ponzi scheme hits mystery hedge funds Brett Arends' ROI - MarketWatch

Ponzi scheme hits mystery hedge funds Brett Arends' ROI - MarketWatch:

When it comes to investments, if it looks to good to be true, it probably is.
"The alleged Ponzi scheme was a doozy. The SEC says that from 2006 through last year, Clark raised $47 million from investors for his firm, Impact Cash, an online payday lender making loans to the poor at Chili Palmer rates.

He promised his backers annual returns of up to 80% a year.

You heard me. Eighty percent a year.

One hundred and twenty investors took the bait."

Monday, March 28, 2011

Housing market: 13% of all U.S. homes are vacant - Mar. 28, 2011

Housing market: 13% of all U.S. homes are vacant - Mar. 28, 2011:
"High residential vacancies are killing many housing markets, as foreclosed homes sit on the market and depress sale prices and property values.

And it's only getting worse: The national vacancy rate crept up to just over 13% according to last week's decennial census report."

I wonder what it is in specific cities. If I get a chance after class I will look.

Sunday, March 27, 2011

Want To Retire Wealthier? Start by Scanning Your Photo -

Want To Retire Wealthier? Start by Scanning Your Photo -
"...according to the Center for Retirement Research at Boston College, 51% of American households are at risk of being unable to maintain their standard of living in retirement, up from 43% in 2004. The center estimates that savings shortfall at $4.2 trillion, or roughly $120,000 per household at risk. In sum, despite decades of badgering, Americans are farther behind than ever in their struggle to save.

Behavioral science offers at least a partial answer: To make long-term financial goals more achievable, you must make yourself feel as if the future is now.

and later:
"Why is it so difficult for people to set aside money for the long-term future? Low earnings and high temptations are obvious reasons. But perhaps the most basic cause is a fundamental human frailty: We view our future selves as strangers. "

The article also has the financially incorrect item that both Buffett and I do: use future values for calculating how much to spend. (See Buffett's $300,000 haircut example.) Incorrect financially, but it works. (or at least did when I used

Behavioral Finance from PBS' Nova

Behavioral finance (a must watch for class!)

Tuesday, March 22, 2011

Vertical and horizontal deals

In class we talk often of the differences between vertical and horizontal mergers. This week's news will give much food for thought in class:

General Mills Set to Buy Yoplait Stake for $1.1 Billion -
From notes: "Reasons for vertical mergers include reduction of the transaction costs of negotiation."

This is a will become a classic example:
"A crucial aspect of the deal is that the agreement would resolve an outstanding dispute between Yoplait and General Mills, which has held the license to sell the brand in the United States since 1977.

With the licensing agreement up for renewal in 2012, and the two companies unable to come to terms, Yoplait had threatened to terminate the partnership, pushing General Mills to seek arbitration last year.

“This deal represents a solution,” a spokesman for PAI said."

Horizontal deals on the other hand are more regularly to combine operations in order to gain market share (pricing power) or when barriers to entry (Buffet's "Moats") make growth by other means prohibitively expensive due to high fixed costs.

This week's example is the AT&T-TMobile $39 billion deal.   Several class based things worth noting here.  Bondholders of acquiring firms can often lose in acquisitions.

Fitch (via BusinessWeek)  is already warning of a possible downgrade of AT&T debt:
"Fitch Ratings said Monday it has placed AT&T Inc.'s credit ratings on negative watch following the news that the wireless carrier plans to buy its smaller rival, T-Mobile USA, in a cash-and-stock deal valued at $39 billion....The ratings agency noted that much of the cash portion of the buyout will be financed with debt."
Because of increased market power (ie a wee bit closer to a monopoly) horizontal deals come under close scrutiny by regulators.  The rationale is that with increased size, comes increased power to raise prices.  This is brought forward in the  WSJ :

"The companies will have a tough road to prove to regulators that a combined AT&T-T-Mobile won’t have too much power to control wireless pricing."
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Thursday, March 17, 2011

The high that comes from giving - Economy and Politics -

BeThe high that comes from giving - Economy and Politics -
"Helping, sharing and donating aren’t attributes unique to people. Dictyostelium mucoroides, a well-researched species of mould, has been shown to compromise its own well-being for a larger cause. When there’s a shortage of food, these unicellular organisms that normally exist as isolated amoeba, aggregate to become a multicellular entity even though such an act often starves and destroys certain individual mucoroida. A better known instance is that of honeybees that unflinchingly and suicidally sting predators when defending their hive."
and later
"“The brain is rigged,” said Baba Shiv, a professor of marketing at the Stanford Graduate School of Business and whose research emphasis is on the psychological motivations that dictate people’s spending decision. “When we make a donation, however small, there’s a release of dopamine (a chemical that generates a burst of pleasure) and many of the activities that we spend time and money on are for dopamine fixes,” he said."

Class, READ UP! :)

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Wednesday, March 16, 2011

The psychology of selling - The Irish Times - Mon, Mar 14, 2011

The psychology of selling - The Irish Times - Mon, Mar 14, 2011:
"We’re beginning to see that it’s not the way we long assumed it was, particularly not the way professional economists assumed it was.” This has implications for how politicians and economists regulate and model future behaviour, but also for how we manage our own consumption. Some of the insights coming from behavioural economics have been known intuitively by marketeers and advertisers for decades.

We like to follow the crowd, we favour familiarity (and so tend to prefer well-known but inferior brands over superior newcomers), we tend to go with default settings rather than making individual changes and we instinctively put all our eggs in one basket (hence the property bubble). However, even the marketeers underestimated just quite how irrational we actually were."

the examples are good...for instance:

“If you offer people a cash discount for paying in cash instead of plastic, a certain proportion of people will pay cash and get the discount,” he says.
“However, if you change it so that it’s exactly the same situation but you call it a ‘credit card surcharge’ suddenly the proportion of people who do it will radically alter. Very few people will be willing to pay the surcharge and they will put in the effort and will pay in cash instead. But it’s basically the same decision."

Does Stock market harm investment incentives?

A fascinating article on Harvard's Governance Blog today. A MUST read for class.

Does the Stock Market Harm Investment Incentives
? by Asker, Farre-Mensa, and Ljungqvist.
"The theory literature in economics and finance has long argued that the separation of ownership and control following a stock market listing can lead to agency problems between managers and dispersed stock market investors and hence to suboptimal investment decisions. The literature is divided on whether overinvestment (i.e., empire building) or underinvestment (due to rational short-termism) will result, or indeed whether effective corporate governance mechanisms can be devised to ensure investment does not suffer. "
and later:
"We also show that public companies tend to smooth their earnings growth and dividends and are reluctant to report negative earnings. One interpretation for these patterns is that public firms treat investment spending as the residual after having paid dividends out of their cash flows, whereas private firms treat dividends as the residual after paying for their investment out of cash flows. "

From The paper's abstract:
"Theory suggests that agency problems resulting from separation of ownership and control can cause stock market listed firms to invest suboptimally... Listed firms invest less and are less responsive to changes in investment opportunities compared to observably similar private firms, especially in industries in which stock prices are particularly sensitive to current profits. Listed firms also tend to smooth earnings growth and dividends and avoid reporting losses. These patterns are consistent with models of managerial myopia and do not appear to be due to firms endogenously choosing to be public or private: Firms that go public for reasons other than to fund investment invest like private firms pre-IPO and like public firms post-IPO. Nor do the results appear to be driven by measurement error, tax effects, or firm life-cycle effects. Our evidence suggests that the stock market distorts investment, at least for the fast-growing companies in our sample."

Cite: Asker, John William, Farre-Mensa, Joan and Ljungqvist, Alexander, Does the Stock Market Distort Investment Incentives? (March 13, 2011). ECGI - Finance Working Paper No. 282/2010. Available at SSRN:

Definitely I^3=Interesting, Informative, and Important!

Monday, March 14, 2011

Derivatives, as Accused by Warren Buffett -

Derivatives, as Accused by Warren Buffett -
Two interesting look-ins for class:

"Mr. Buffett defended Berkshire Hathaway’s use of derivatives, arguing that the company maintains a limited amount. At the time of the interview, the company had only about 250 derivative contracts. (It’s now down to 203.) “I want to know every contract, and I can do that with the way we’ve done it. But I can’t do it with 23,000 that a bunch of traders are putting on.”
"Many companies, as diverse as Coca-Cola and Burlington Northern, argue that they employ derivatives to hedge their risk. The United States-based Coca-Cola tries to protect against fluctuations in currencies since it does business around the world. Burlington North, the railroad giant, uses the investments to limit the impact of fuel prices.

Mr. Buffett, who has interests in both companies, claimed there was another agenda. “The reason many of them do it is that they want to smooth earnings,” he said, referring to the idea of trying to make quarterly numbers less volatile. “And I’m not saying there’s anything wrong with that, but that is the motivation.”

Arming the Donkeys - Download free content from Duke University on iTunes

Arming the Donkeys - Download free content from Duke University on iTunes:

"Dan Ariely ('Predictably Irrational') is your host for a weekly series of informal one-on-one chats with researchers in social and natural sciences."

Great stuff!

Sunday, March 13, 2011

Americans' Wealth Jumps 3.8 Percent -- Thanks To The Stock Market

Americans' Wealth Jumps 3.8 Percent -- Thanks To The Stock Market:
"Thanks to a rebounding stock market, Americans' household wealth increased by $2.1 trillion last year, even as high unemployment and a sagging real estate market weighed down the economic recovery.

At the end of last year, American households saw their net worth rise 3.8 percent over the previous year to $56.8 trillion, according to figures released this week from the Federal Reserve."

Thursday, March 10, 2011

Rats can teach humans some investing savvy

The Durango Herald 02/16/2011 | Rats can teach humans some investing savvy:
"In the experiment, researchers flash two lights, one green and one red, onto a screen. Four out of five times, it’s green; the other time, the red light flashes. But the exact sequence is kept random.

When rewarded for correct picks, rats and pigeons quickly discover the best strategy is to always pick green, guaranteeing an 80 percent correct-pick rate.

Humans, however, tried to anticipate when the red light would come on. This misguided strategy, on average, leads people to pick the next flash accurately only 68 percent of the time.

Stranger still, humans persist in this behavior even when researchers tell them the flashing lights are random. And while rodents and birds quickly learn how to maximize their score, people often perform worse the longer they try to figure it out.

Humans often see what they think are long-term trends but base their analysis on short-term data."

Salman Khan: Let's use video to reinvent education | Video on

Salman Khan: Let's use video to reinvent education | Video on "Salman Khan talks about how and why he created the remarkable Khan Academy, a carefully structured series of educational videos offering complete curricula in math and, now, other subjects. He shows the power of interactive exercises, and calls for teachers to consider flipping the traditional classroom script -- give students video lectures to watch at home, and do 'homework' in the classroom with the teacher available to help"

Thanks to SimoleonSense for this!
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Wednesday, March 09, 2011

Short on sleep, brain optimistically favors long odds - Farnam Street

Short on sleep, brain optimistically favors long odds - Farnam Street:
"Sleep deprivation can lead to plenty of unwise decisions, which researchers have long tied to flagging attention and short-term memory. But a new study shows how just one night of missed sleep can make people more likely to chase big gains while risking even larger losses—independent of their tapering attention spans.
Well that explains a few