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A Reader Response to My Pessimism

In the interest of fairness, my optimistic reader friend has sent me this. Since he make his points extremely intelligently without saying “your an idiot” for thinking different, and because of his position in the investing world, for the benefit of readers I am obliged to post his thoughts. I hope this elicits conversation on the merits of either argument. I am reprinting verbatim, there is no editing of his comments on my part.

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Todd,

I am not as pessimistic as the current interest in gold as a harbor of safety. The hosts of historical precursors to market improvement are overwhelming. The fact that no one believes them at this time is typical of a market bottoming process. Positive economic change has never been accepted by investors until it has been on a clearly defined trend for some period. This is why “Value” investors hold such status in our society for being able to see through the “fog of fear” and still make successful investments.

I can say that this is a time to be very bullish, but no one wants to listen. At the moment those who are gleeful of the values they see at present are often treated negatively in the press as Buffett has recently because his investment activity and positive commentary has not relieved investor pain with an obvious market turn for the better quickly enough to satisfy the need for instant gratification.

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Both of these indicators are viewed as reflecting the investment behavior of individuals who are thought to have an above average sense of investment valuation. These indicators are believed to reflect both that future changes in the business climate are perceived to be positive and that the current levels of business valuations are attractive. In essence these indicators are believed to measure the value perceptions of individuals who are better informed than the average investor.

It is important to point out that neither tops nor bottoms are indicated precisely, nor can this information be used with precision at the individual security level. However, even without the desired precision, I view these indices as very useful in supporting a contrarian approach.

Currently, the readings from these indices remain quite bullish and are typical of the market being in a bottom formation period.

Don Hays describes the Smart Money Index as:
“This is an index that is prefaced upon the principal that the trading during the first 30 minutes of each day is very emotionally based, and depends so much upon the fresh “hype” of the morning news and media “talk.” That is considered “dumb” money. But the trading in the last one-hour of trading is not very news motivated at all, in fact it is based solely upon the overall reasoned out logic and analysis. That is considered “smart” money. So the cumulative index simply subtracts the performance of the Dow during that first 30 minutes, and adds the performance of the last one-hour. The signals come when the “Smart Money” index does not confirm the new highs or lows of the Dow Jones Industrial Average’s.”

The Gambill Insider Buy/sell Ratio (below the Smart Money Index) is a simple moving avg of insider buys/insider sells of the Russell 3000.




He finishes with the following quotes:

Warren Buffett, “Be fearful when others are greedy and greedy only when others are fearful”

Bruce Berkowitz,”Ignore the crowd!”

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Friday’s Links

Press, Press, Press, Buffett

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– Too hard on Obama

– Too easy on Obama

– “Even the Seagulls were in awe

– Kass, as always make some valid points
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Buffett on PBS (video)

Berkshire’s (BRK.A) Chairman talks about buying back his own stock for the first time.

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Munger on Psychology of Human Misjudgement 1995

This is a Charlie Munger classic. For those who do not know Munger, he is essentially (for lack of a better term) Warren Buffett’s partner at Berkshire Hathaway (BRK.A)

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Munger on Psychology of Human Misjudgement 1995

Publish at Scribd or explore others: Academic Work charlie munger berkshire hathaway


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Berkshire Buys 4.2 Million Burlington Northern Shares $$

Warren Buffett loves Burlington Northern (BNI) and now has 22% of the shares.

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Berkshire Hathaway (BRK.A) now controls 74,452,029 shares of the company after picking up over 4 million more between $61 and $62 a share 1/15.
SEC Filing


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Buffett on Dateline (video) $$

Berkshire Hathaway’s (BRK.A) Warren Buffett talk about his support for Barack Obama, the economy and what needs to be done..

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So, the first half of the interview was obviously written by the Obama Press Team and is little more than a “isn’t our guy great” puff piece, only missing Brokaw and Buffett hugging and kissing as tears of unbridled joy steam down their faces. The middle two minutes of it actually has some value in economic terms. For those only interested in that, go to 2:50 of the interview. The last minute is more of the first.

It is unfortunate though that Brokaw had Buffett on and all that was gleemed from the interview was a recitation of what we have been hearing about Obama and two minutes of the current economic climate..

An opportunity missed…


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The Future of Print Newspapers

Washington Post Media CEO Katharine Weymouth speaks with Aspen Institute President Walter Isaacson about the future of The Washington Post and the news industry. Warren Buffett’s Berkshire Hathaway (BRK.A) is a majority shareholder of the Post.

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A Reader’s Take on Management

This reader has a great point on Berkowitz and Buffett…

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From a Reader…

Kiplinger asks what went wrong at Dodge&Cox. Why did Fairholme (FAIRX) sidestep the mess at AIG (AIG) and some others? Pabrai has discussed Berkowitz as a manager that places great importance on the financials, but also importantly on the management skills.

I sold my AIG in the mid-$30’s because I gradually became aware of Martin Sullivan’s shutting off the credit risk reviews as unimportant to the business while I knew that Greenberg was on top of risks daily. Managers who simply review the #’s missed this change in risk monitoring including Davis even though Davis in particular felt that they had special insights to their companies.

In my view there is no such thing as a “Moat” often touted by value managers because of your market position. Many have taken up the “Moat” banner, i.e. Morningstar with a “Moat” rating.

AIG is a clear example of a company’s management style causing the companies virtual extinction. The only “Moat” a company has vs. competitors is a qualified management and culture. Lose this and the company can lose everything. Investment managers who do not understand this will have markets in which their shallow, numbers only methodology will fail to protect their clients.

Berkowitz and Berkshire’s (BRK.A) Buffet have the learned to distinguish between good and bad management as well as calculate buy and sell valuations.

The Kiplinger question has missed the “management quality” just like 99.98% of investors. We do not teach “How to identify good management?” Most people simply look at the historical financials and assume a new manager’s record will continue in the same direction. NOT NECESSARIALY!!!!

Berkowitz looks more deeply than any other mutual fund manager I know and it shows in his results.

Here is the Kiplinger Piece.


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Did New Cars Sales Bottom in November?

Read the following article….

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AutoLine Reports

Yes, car sales look terrible for December. But that’s if you compare sales to the same month a year ago. The market has changed so much from then that I would argue you can’t get an accurate read on what’s going on right now, if you’re only measuring today’s sales against 12 months ago. A better gauge is a running average over the last 6 months. Car sales are in a terrible state, but the bottom may actually have been reached in November. In fact, sales were up by nearly 150,000 units or nearly 20% in December vs. November.

January could be better. GM and Chrysler received the first installments on their bridge loans, which instilled some level of confidence in the market. GMAC received TARP money which will help stabilize quite a number of dealers. GM immediately began offering low interest loans and resuming national television advertising.

That’s not to say the market is on a rebound. But it may well be that we hit the low point two months ago and are starting to inch up

So, for my investment in AutoNation (AN) and Berkshire’s (BRK.A) Warren Buffett’s in CarMax (KMX) this means the 10,000 year flood may have crested and may be receding. What is left? Over a thousand fewer dealers, pent up demand and and TARP backed loans from the automakers.

Of course it is early to tell if this is a one month anomaly or a trend but this is certain, it is the first sign of good news in some time.

AutoNation CEO Mike Jackson will update investors at the end of the month when earnings are released. Expect earnings to be dismal, what is important is what he says about the current environment and what he sees going forward..


Disclosure (“none” means no position):Long AN, None
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Thursday"s Links

Buffett, Madoff

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– Great informational page

The victim list

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WWGB or "What Would Graham Buy"?

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According the Bloomberg, Jim grant says:

Pfizer Inc. (PFE) and Tiffany & Co. (TIF) are among eight stocks that Benjamin Graham, the father of value investing and Warren Buffett’s mentor, would buy, Grant’s Interest Rate Observer said.

Cooper Industries Inc. (CBE), Nucor Corp. (NUE), Cintas Corp. (CTAS), Archer Daniels Midland Co. (ADM), Molex Inc. (MOLX) and RadioShack Corp. (RSK) also meet the seven criteria Graham presented in 1973 for stocks that a “defensive investors might buy with confidence,” according to the latest issue of Grant’s, which was released today.

“That there are as many as eight is a notable fact,” the newsletter said. “In March 2003, near what would prove to be the bottom of the post-Nasdaq washout, Grant’s could identify only two that met the grade.”

Graham favored companies that have “adequate size;” current assets that exceed liabilities by two times; 10 straight years of profit; 20 years of uninterrupted dividends; 10 years of earnings growth exceeding 33 percent; a price-to-earnings ratio of less than 15; and a price-to-book ratio that’s less than 1.5, according to Grant’s, an investment newsletter founded by James Grant in 1983.

“Security Analysis,” published in 1934, provided a road map for value investors including Buffett, the chairman of Berkshire Hathaway Inc.

An equal-weighted index of the eight companies Grant’s identified has surged 32 percent since Nov. 20, the day the Standard & Poor’s 500 Index dropped to an 11-year low.

Bloomberg article


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Buffett Gets "Put" Another 2.2 Million Burlington Northern Shares

Berkshire Hathaway (BRK.A), (BRK.B) is doing great with the put selling..

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Just a day after getting “put” 3.2 million shares, Buffett gets another 2.2 million shares of Burlington Northern (BNI).

SEC Filing


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Buffett Gets "Put" 3.2 Million Burlington Northern Shares $$

Berkshire’s (BRK.S) Buffett still have the puts he wrote for January outstanding in Burlington Northern (BNI)

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With the $6 to $7 premium Buffett received for the options, he is still ahead in the stock that now sits at $75 and change.

Here is the filing:


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Warren Buffett Sells Jan. Puts on Burlington Northern $$

Been a month and a half since the last transaction for Berkshire’s (BRK.A) Buffett.

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Buffett sold puts on 2.23 million shares at a $75 strike price for $6.35 each. Burlington Northern (BNI) closed today at $74.68. The option strike date is Jan .30th, 2009.


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Tuesday’s Links

Twitter, Buffett, Nigeria, Curve

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5 reasons to like it

Put watch

– The reason OPEC does not mater

This is true

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