Makes Me Smile

Was curious if this site was still operational. Today's activities made me wonder. Brings a smile to my face to see an older version of my journey preserved.

Spent the day at UCLA with the kiddos. Had a perfect afternoon.  A cool breeze carrying bubbles on a warm day under the shade of a tree next to Janss steps. 

Gab's mind was blown that older kids leave home to go to school.

Steve Jobs and my life runway

I really enjoyed reading SJ's bio. The opening quote was from an Apple ad in 1997:

"The people who are crazy enough to think they can change the world are the ones who do."

This and Jobs' ability to focus (whether its marketing, user interface or design) is inspiring, but also a reflection of what happens when your laser-like focus can burn your personal life.

The way I bring back his life story to improving my own is through the following questions:

1.) What do I want to focus on in my life right now? and
2.) How can I change the world?

My answers are as follows:

1.) My main focuses are the following:

• Starting a family / being a good husband
• Refining my abilities to analyze businesses
• Getting to "fuck-you" money in life

2.) How do I make a mark? After hitting my financial targets, it should be a lot easier:

• Enabling family and friends to optimize their lives. This may mean pursuing life interests that may not be economically feasible otherwise.

• Philanthropy. There's a lot of need out there, so even if it doesn't change the world the way Apple designed products that changed society, if philanthropy can save lives (e.g. Bill Gates on malaria) or enable the dirt poor to achieve more in life it can make a dent. The secondary effects of this type of philanthropy aren't easily understood, but I would argue are equally important. After all, the secondary effect of a Nazi guard showing kindness to my grandfather means that I'm around today.
  

• Lastly, one area of focus that could tie my passion (investing) with improving the world could be venture capitalism...financing entrepreneurs to achieve their goals potentially impacting millions. Just look at Sequoia as one example:

http://www.sequoiacap.com/us/growth

Earthquake Alert

Based on all 3 indicators (creaking, dogs barking and spiders) I think there is a very good chance of an earthquake soon.

It's funny, this blog is effectively a diary of one-off events in my life (on love, books, milestones, and experiences that opened my eyes), views of philosophy (human biases, dealing with loss, and appreciating success), and the occasional earthquake warning.

I guess that's me in a nutshell.

Midnight in Paris

I just saw Midnight in Paris.

The ending was perfect.

It's human nature to glorify the past, but the present has even more potential.

Loved it.

Humanity - There It Is

I recently read Tim O'Brien's The Things They Carried. It was a perfect gift as it provided a small break from my investing addiction.

There were so many complex themes about the human condition. While this short blog will not do the book justice, (which is sadly ironic given that a sub-theme was for memories that never received their due) below are some preliminary notes.

The book reinforced my belief in the need for a life philosophy that incorporates unfairness, cruelty and randomness. That's not to say we should all be bitter. Far from it. It’s just important to have a tool kit that can handle the whole picture.

The "do-onto-others" view is only part 1 of a broader philosophy. Reading Harold Kushner's "When Bad Things Happen to Good People" is in some ways an equally critical second chapter. In particular, I mean Kushner’s conclusion that there is no morality in the laws of nature. The holiness is found in that the laws of nature are upheld no matter whom you are – sinner or saint.

By no means am I criticizing these troops, but I think that these men largely adapted to the sudden death and inescapable tragedy of Vietnam through mind-tricks that remedied the immediate tension while leaving longer term scars. A solider dies after taking a piss and he's termed "zapped while zipping." A best friend dies, and a man shoots a baby buffalo in anger. These behaviors are not uncommon and rhyme with both prior and subsequent wars. I do not criticize these actions, after all I was not there and I have never experienced such horrific tragedy up close. But that’s why I enjoyed the book so much. It gave me a between the ears perspective of what they lived through. They used the coping mechanisms at hand to deal with the dark side of life. There it is.

A Tale of Two Worlds

I don't feel like it's appropriate to have a journal that captures both my financial and emotional thoughts all in one domain so I've decided to start a new financial blog at:

http://grindingvalue.blogspot.com/

Its cracks me up that one of my first posts is about "Diana." I guess even the markets have a sense of irony.

Crohn's

Q: "Mr. Munger, what advice do you have for handling the natural but unexpected adversity of life?"

A: You must solider through. Coping with adversity brings opportunity.

This is a brief interaction I had with Charlie Munger at his "Morning with Charlie" last month. I didn't realize how soon afterward I would rely on this advice and feel lucky to have gotten it.

As I've learned, the "opportunity" he spoke of, is in getting to know yourself and loved ones better, depth and limits. Proving our willpower and emotional fortitude.

In all honesty, it's tough for me to put to words everything felt and experienced over the last few weeks. Jess's stomach pains had been worsening for the last few months as she rotated through different medications from her Dr. Startlingly, her conditions started to spread beyond her stomach. Low grade fevers ever night. Strange bumps on her legs. Within a few days time she was re-diagnosed by a different Dr. and days later admitted to the ER and hospital.

Jess was diagnosed with Crohn's disease. From what I understand, it's an auto-immune disease where her body fights itself, creating ulcers in her intestine and colon. There are no cures for Crohn's, but medicine is available to keep it in remission for years. There were some other complications which needed a small surgery, but Jess has been back home since the previous Friday and has not been in pain since. While the initial diagnosis was upsetting, especially when I found out that she had been admitted to the ER while I was at work, as my Mom says, "thank God it's not cancer."

I'm relieved that Jess has made so much progress in less than two weeks. All that we can do now is to keep moving forward, step by step, one foot in front of the other. We still have a little ways to go, but she's making significant progress.

This morning I realized that the best summary for how I feel is a bizarre combination of two songs: Time in a Bottle, by Jim Croce and Amado Mio by Pink Martini. There's a melancholy appreciation for the finite duration of our lives while at the same time realizing that the sacred experiences we now share bring us closer than we have ever been.

It has been an opportunity to learn about love and how much I love Jess.

That said, this week was pretty cool

Before reading this, you should know that this note is an unstructured collection of random thoughts, aka verbal diarrhea. I only wrote this because I felt like writing what was on my mind. You've been warned.

This past month, I have gotten the opportunity to meet the top management of both Hulu & Netflix. A few months prior I met the CEO of Caterpillar and in a separate occasion had a conference call with Nat Rothschild of "Baron Rothschild" fame. It's all pretty cool stuff and it's fun to see how these Atlas's are moving the world. I'm sure I'm forgetting some other memorable characters, but this evening I'm drawing a blank.

On a separate note, sometimes people like to deride those employed in the financial industry. At one wedding recently (cousin's of my mother in-law) one of the best men said something like "the bride stopped working at Citigroup because she wanted to do something with her life." I don't blame him as it's easy to think it's one big casino where overpaid assholes move around stacks of paper with no value add to society, but I disagree with this perspective. Yet I also disagree with the idea that it's "God's work" as Llyod Blankfein described it. I think the answer is clearly somewhere in between. If pension funds didn't compound their money by investing in hedge funds and other investment products (including ETFs), there would be a lot of burnt out retirees eating dog food into their 70's.

Sometimes in a Mad Hatter sort of moment I try to force myself to imagine impossible scenarios. One of which is what if I didn't work in finance? If this was the case, and I had to restart my career with absolutely no venues for finance (aka I couldn't even be bank teller), I would like to think that I would strive to work at the cutting edge of some industry. Potentially media, energy or computer programming. There would also be the serious risk that I would consider the stable route which I knew would pay well at the expense of having some cool experiences (aka why the suicide rate in dentistry is so high). I would like to think the experience of riding the wave of some game-changing technology would be a lot of fun.

Small Miracles

How the fuck did I get here?

It's a strange moment trying to connect what seems like an infinite string of nearly-impossible events that got me where I am today. Yet somehow, I'm here. And it's not just me. We're all here due to one small miracle leading another.

There's a true story, or so I believe, about my grandfather. I only say "so I believe," because the story passed from word of mouth from my grandfather, to my Dad to me. I trust nearly everything my Dad has told me growing up, and for good reason, so I have no reason to believe that this story is untrue. That said, I have never asked to confirm the story with my grandfather as I sadly don't have the relationship with him where I would be comfortable asking him to relieve some of his most painful experiences.

That said, when he was around my age or younger my grandfather lived and worked and nearly died in a concentration camp. At one point during this nightmare, he was told to march along with hundreds of prisoners. These marches were notorious for their ability to sift through the Jews that still had their strength to work and the more sickly that would be executed as they stumbled and fell behind. Towards the end of one these marches, my grandfather fell. He was exhausted and had begun to accept what would likely be a swift termination. Instead a Nazi guard came to my grandfather and persuaded him to get up and keep going as there was only a short distance left. Now I don't know what it was that re-motivated my grandfather to get up, or even why the Nazi guard would persuade him to, but he did. And from those small miracles, my family is here today.

So on this Father's day, we should not only be appreciative for what our Father's have done, but what all the Father's (and Mother's) before us have done, whether or not we understand what it was or even know why it happened.

Lollapalooza of Books

"When several models combine, you get lollapalooza effects; this is when two, three, or four forces are all operating in the same direction. And, frequently, you don't get simple addition. It's often like a critical mass in physics where you get a nuclear explosion if you get to a certain point of mass -- and you don't get anything much worth seeing if you don't reach the mass." - Charlie Munger

I recently finished reading three books: Seeking Wisdom: From Darwin to Munger, Predictably Irrational and Moonwalking with Einstein. While each of these were dynamite as standalone reads, I think the value of combining the three creates a "lollapalooza" effect, similar to what Munger describes above.

As an illustration, Seeking Wisdom is an encyclopedia of valuable life lessons. My favorite chapter is about Munger's list of human biases. These biases are as follows:

1. Mere Association
2. Incentives
3. Self Interest / Self Dealing
4. Self Deception / Denial
5. Consistency
6. "Super-Deprival" Syndrome
7. Status Quo - Do Nothing Syndrome
8. Impatience
9. Envy / Jealousy
10. Contrast Comparison
11. Anchoring
12. Vivid Imagery
13. Abstract Blindness
14. Reciprocity
15. Bias from Liking
16. Social Proof
17. Authority
18. Sense-Making
19. Reason Respecting
20. Believe First, Question Latter
21. Memory Limitations
22. Do-Something Syndrome
23. Say-Something Syndrome
24. Emotional Arousal
25. Stress
26. Chemical Influence
27. Lollapalooza Effects

While this list is not perfect, it's value lies in the fact that it provides a framework for understanding biases and predictable misjudgments. For example, as you read through Predictably Irrational, you start to realize that while the book is wonderful in its examples (which Seeking Wisdom draws from), Dan Ariely doesn't really take the next step in providing a conclusive map of biases.

To take it another step, once you memorize the biases from Seeking Wisdom, you also start to notice how some of the chapters in Predictably Irrational are in fact the result of multiple biases (lollapalooza) all running in the same direction (sometimes the same as in previous chapters but in a different form).

For example in Chapters 11 and 12, the student that takes an exam where each question answered correctly is rewarded with a token that is exchangeable for cash, may cheat because of incentives (#2), self-interest (#3) and abstract blindness (#13) (the tokens don't feel like your stealing cash but you still are). The student that doesn't cheat on the same test because they sign a document indicating they follow a fictitious moral code, has mere association (#1 ) and consistency (#5) biases working in their favor.

So where does Moonwalking fit in? The reason why I liked Moonwalking with Einstein, is because it provided a framework that makes it easier to memorize large (and small) chunks of data. In this case, I used the "method of loci" to memorize the list of Munger's biases a few weeks ago.

While I consider all three books "required" life reading, I would add the provision that Moonwalking should be required reading before starting high school. I wished I had known about these memory tools years ago.

Moonwalking with Einstein

This memory stuff is Jedi craft. I think I'm going to order the book:

Moonwalking with Einstein

Puzzles, Clues and Poker

"What I like is solving puzzles. I think that what you are dealing with here is incomplete information. You've got little bits of things. You have facts. You have analysis. You have numbers. You have people's motivations. And you try to put this together, decode the puzzle in a way that allows you to have a way better than average opportunity to do well. That's the best part of the business. "

- David Einhorn, founder of Greenlight Capital


I love investing because it requires an open mind and a constantly evolving lattice work of ideas. What's fun is that frequently the ideas overlap with major concepts in other fields (economics, psychology, statistics, physics, law, poker, etc.) so incorporating one new way of looking at something can literally change how you approach questions / problems the rest of your life.

For example, my history of trades reflects how my mental models have developed over the past decade. One baby step at a time it has evolved from gambling on chart price fluctuations, to using liquidation as a pricing backstop, to low free cash flow multiples, to investing by valuing the intangible aspects of a business that can add exponentially to the enterprise value over time. My most recent development is about searching for "clues."

While searching for "clues" is definitely not something most investors will ever admit they're doing as it can create the impression of trivializing "serious" work, but the concept is actually commonplace in another field: Poker. In poker, players are constantly listening for "tells" or signals that may give away an event or behavior before anyone else realizes it.

Let's start with a straight-forward, first example on Netflix (NFLX). Investors have lost millions (perhaps billions) trying to short Netflix. I could argue that it's been for good reason as NFLX stock is certainly not cheap.

The day before NFLX released its 4Q'10 earnings it traded at ~$180 per share. This would equate to a $9.4bn valuation. To put this figure in comparison, their free cash generation in 2010 was $25mn (of course I'm benefiting from information that wasn't available at the time, but it's still effective for making my example for reasons you'll see shortly). If I exclude the cash outlays they made to improve their DVD and streaming libraries their free cash generation was $242mn. So just based on the math you can see why the stock is not cheap ($240mn divided by $9.4bn valuation equates to a 2.5% yield). In order to justify paying $180 for NFLX stock, you'd have to believe NFLX will grow its business exponentially from current levels (currently has 20mn subscribers vs. ~100mn U.S. households). So on a high-level this covers the fundamentals. What about the clues?

Given this lofty valuation, one hedge fund investor even went so far as to published a letter titled "Why We're Short Netflix." Shortly afterward, Reed Hastings, the CEO of NFLX, published a response piece called "Cover Your Short Now." Now, this is a monster of a clue for several reasons. First, if the CEO is telling you to not bet against their stock weeks before they report 4Q'10 results, you may be right in the long-term, but in the short-term the CEO knows more than you do. Second, this means the CEO is watching the stock and any bad news associated with it, so he's going to do everything in his power to manipulate it higher. Whats this all mean? Walk away. The clue is that Mr. Hastings wouldn't put out a positive letter weeks before earnings if the results wouldn't be amazing and impress Wall Street.

Later in January NFLX ultimately did report knock-out 4Q'10 results and the stock quickly shot up to $240 (30%+ higher). While its now even more expensive, a lot of short-sellers could have avoided the near-term pain had they combined their fundamental analysis with interpreting a very obvious clue. Hindsight is 20/20.

If you keep an open mind, you start to realize that there are clues all over the place. As another example, look at Southwest Airlines (LUV). Now this is a much more subtle clue with a less significant price fluctuation (and less extreme valuation divergence) but it's still worth mentioning.

On 1/20/11, LUV reported 4Q'10 results. During the call management talked about their expectations for the month of January:

"Our January revenue and booking trends thus far suggest a year-over-year improvement in our January PRASM [a proxy for pricing] similar to or possibly slightly better than the 5% year-over-year improvement in December 2010 PRASM."

But then, only a few weeks later on 2/3/11 management provided the following comments at an investor conference:

"Our January 2011 revenue in Traffic will be reported early next week. But at this point in time, we are estimating that the year-over-year increase for January will exceed the 5% year-over-year increase that we reported in December."

Do you notice the difference? If not, I would suggest you reread each of the quotes.

What you should see is that the tone changed. January went from should "possibly" be "slightly better" than 5% PRASM growth to "will exceed the 5%." It's a subtle difference, but if you were a shrewd trader you would have bought the stock just by observing the difference. What's even more telling is how the stock dropped 12% from 1/5/11 to 2/3/11, the same day as the investor conference. In the week following the conference, LUV stock rallied 7% and on 2/7/11, management reported ~8-9% PRASM growth for January.

Learning this clue-based model has reinvigorated my joy of investing because I know the clues are out there, I just have to be receptive to them. That said, investing still requires a lattice work combining short-term data points with long-term valuation techniques. Just b/c you successfully interpret a clue (like that NFLX is going to report a good quarter or LUV is going to report a solid January figure) doesn't mean you should make the investment. The business can still be overvalued (ala NFLX) or susceptible to external shocks (LUV subsequently traded back down b/c of the current oil spike) so you must weigh the separate variables accordingly.

"Married GOP Congressman Sent Sexy Pictures to Craigslist Babe"

Link

A few questions:

1.) How can someone so stupid get elected (Rep. Christopher Lee)?

2.) Is our populace really so dumb that we elect someone so stupid?

3.) Who ran against Rep. Lee?

This sort of story is really just another incremental data point to the philosophy that our society only improves due the influence of a few exceptional people despite the overwhelming stupidity of the masses.

Munger Freeway Joke

Without trying to sound too much like an old miser ranting about the loser generation below, it's worthwhile to couple the tirade with a joke Munger said about what it feels like to go against the grain. I don't have the exact script of the joke, but to paraphrase:

A wife is waiting for her husband to return home and she turns on the television to pass the time. The news comes up that shows a man driving the wrong-way down the freeway. Startled that this is the same freeway her husband comes home on, she calls her husband to tell him:

"Husband, be careful - someone's on the freeway driving the wrong direction."

"One?" The husband responds, "there's hundreds of them."

Great Quotes

What I've noticed overtime is that reading and writing helps me center myself, and recharges my mental battery in ways that's only second to getting sleep and showering. Below are some recent memorable quotes. It always impresses me with how the bright candles in the financial field can find these metaphors and overarching themes that apply to other areas of life.

The mating rites of mantises are well known: a chemical produced in the head of the male insect says, in effect, “No, don’t go near her, you fool, she’ll eat you alive.” At the same time a chemical in his abdomen says, “Yes, by all means, now and forever yes.”

While the male is making up what passes for his mind, the female tips the balance in her favor by eating his head. The male, absorbed in the performance of his vital functions, holds the female in a tight embrace. But the wretch has no head – he has hardly a body. And, all that time, that masculine stump, holding on firmly, goes on with the business! - Annie Dillard, Pilgrim at Tinker Creek (from Bill Gross's recent investment outlook from January 2011 comparing recent policy stimulus focused on maintaining consumption to the mantis matting rituals)

Another from Dr. Marc Faber's January 2011 Gloom Doom and Boom reports:

"One of the annoying things about believing in free will and individual responsibility is the difficulty of finding somebody to blame your problems on. And when you find somebody, it's remarkable how often his picture turns up on your driver's license." - PJ O'Rourke

Howard Marks, also wrote about his take on gold in a memo title "All that Glitters". He compares it to Noah S. “Soggy” Sweat, Jr., a member of the Texas House of Representatives in 1952, about his position on whiskey:

If you mean whiskey, the devil’s brew, the poison scourge, the bloody monster that defiles innocence, dethrones reason, destroys the home, creates misery and poverty, yea, literally takes the bread from the mouths of little children; if you mean that evil drink that topples Christian men and women from the pinnacles of righteous and gracious living into the bottomless pit of degradation, shame, despair, helplessness, and hopelessness, then, my friend, I am opposed to it with every fiber of my being.

However, if by whiskey you mean the oil of conversation, the philosophic wine, the elixir of life, the ale that is consumed when good fellows get together, that puts a song in their hearts and the warm glow of contentment in their eyes; if you mean Christmas cheer, the stimulating sip that puts a little spring in the step of an elderly gentleman on a frosty morning; if you mean that drink that enables man to magnify his joy, and to forget life’s great tragedies and heartbreaks and sorrow; if you mean that drink the sale of which pours into Texas treasuries untold millions of dollars each year, that provides tender care for our little crippled children, our blind, our deaf, our dumb, our pitifully aged and infirm, to build the finest highways, hospitals, universities, and community colleges in this nation, then my friend, I am absolutely, unequivocally in favor of it. This is my position, and as always, I refuse to compromise on matters of principle.

I recently watched an hour-long video of Hans Rosling a great Statistics teacher (non-finance), that was eye-opening. The beginning was kind of neat but got progressively more interesting throughout the hour. There was one quote from a Stanford professor tracking Tweets to measure emotions and some stuff which I can't remember, and I can't remember exactly what he said but it went something like this:

It's interesting how when you're younger happiness is frequently tied to something new and exciting, whereas when you're older happiness it's tied to peace. (I couldn't agree more.)

Link to the video below:

http://valueinvestingworld.blogspot.com/2010/12/joy-of-stats.html

Why I Turned to Value Investing

This is a follow-up post to the one below called, Tongue in Socket.

Recently I was talking with Steve, my psychologist /trader friend who had an epiphany when seeing one of his teenage clients. He wrote the following:

"I was working hard yesterday to solve a clinical puzzle...redoing the data, my conclusions and then, after much discussion and thought, I came to the conclusion that, differences aside, your whole generation is very vulnerable / at risk... [where we'll] probably get more leadership positions going to Indian's and Chinese (which I think is a good thing)....I realized that without an individual assessment, each child/teen I saw wasn't so much suffering from neurosis as needing to be rescued from going over the falls. And they don't know it. They think they're doing great, which makes treatment a tough sell, because the parents believe it too! Then I realized, "hey wait, didn't Charlie repeatedly tell me this is the 'loser generation.' Why keep doing psych analysis when I should just accept the sociological perception Charlie has already done and stop suffering over each situation. Also, as one of my patients hauls-ass, I realize that more than solving neurosis, she/he is being saved from the Loser Generation."

Of course, I was flattered, which is why I'm also sharing it. In response I opened up a little bit about myself:

"I think on a subconscious level it helps explain my general antisocial tendencies. Spend 3 years at my middle school, 4 years at my high school, spending most lunches trying to figure out why I prefer eating by myself and I've had enough of my generation (obviously with a few exceptions). After a few years you reach the conclusion either I'm the loser or everyone else is.

This also helps explain my attraction to value investing at an early age. As a kid I said, wow these Buffett and Munger guys sure don't seem like losers. Not only that, but I can get rich betting against the crowd!

It was a perfect fit for an insecure Jewish boy who didn't fit in and desperately didn't want to be a loser.

Tongue in Socket

Recently my brain has felt like I put my tongue in an power socket but instead of getting a shock and going bald, I have several high-voltage ideas zipping around my head and thankfully still seem pretty hairy. Yeah I'm a sucker for corny metaphors (until you realize that my mom actually persuaded my uncle to do this when he young, which may help explain why he's the only bald male on my mom's side of the family) but cheesy analogies help convey the recent experiences.

It's not that I've been living my life that much differently, but the reading material, ideas and conversations have been exceptional. Recently, for example, I finished reading How We Decide which was chalk-full of ideas. A few that spoke to me were:

• One of the worst possible ways to die is to get a brain tumor that fundamentally alters your personality. You effectively live in a shell where your behavior is driven by an overgrowth that's pushing on sensitive spots in your brain. The whole concept of Timshel is meaningless. Steve, my psychologist friend uses the term "psychic death" to describe it, however he uses it not just for tumors but when you stop the ability to learn, or improve your behavior.
  

• Humans have trouble processing multi-variable problems. Jonah Lehrer, the author, details several situations ranging from picking strawberry jams to choosing different cars, where an overload of data can skew our preferences resulting in illogical choices (I think this was Chapter 8). His end conclusion also seems to suggest that if you try to rationalize or explain your preferences you'll actually make worse decisions than if you trust your instincts. It's an interesting idea, and there are many problems where it is better to trust your instincts, or restrict your data, but I think there's a simple mental model he completely missed that's a better answer.

• I would suggest using a checklist. Everyone makes complex judgments and many aren't prepared or have the instincts to do the right thing. A checklist is an easy way to take a multi-variable problem and break it into bite size pieces. For example when I buy a stock, the first thing I look at is the valuation. If it's too expensive I don't bother to consider to consider all the other variables (if it trades at 100x FCF who cares where they're headquartered?). If the valuation checks off, however, I move to safety of the balance sheet, business sustainability and consistency and further down the list. Ultimately this yields a portfolio of companies that meets my value system that I can articulate.
  

• The obvious rebuttal to the checklist is that it assumes that you know yourself well-enough to figure out what you should prefer. This may have been the point after all that we don't consciously know ourselves. But I would argue that if we don't know ourselves, instead of trusting our instincts, we should first think and develop a value system. Then we should consider a checklist, and then trust your instincts. It's like a Jedi knight-thing, you can't do mind tricks until you can move rocks with the force, and you don't move rocks until you can hit the flying zapping ball with your visor down.

After the high from reading Lehrer's book (coupled with the high in the market) I decided to start Seeking Wisdom: From Darwin to Munger. This book is blowing me away. I'm not finished yet, and it's poorly edited, but the content is invaluable (its filled with mind-tricks). Maybe I'll write more about it when I'm finished. What's funny is my Dad-in-law asked if he could borrow one of my copies as he heard about it from another book he was reading!

Another over-arching theme I've been thinking about the last few years is the current generation. I call it the "loser generation." I've noticed that the people I've mentioned this to can have a strong adverse reaction when I say it, but the funny thing is that they usually have kids themselves that have graduated college, are unemployed, directionless and living at home or are getting subsidies in one form or another. While its mostly an anecdote that lacks in data, the "loser generation" is the phrase I use to help explain the behaviors I've seen in my colleagues since middle school and it helps me understand what we're currently living through. This loser generation has been coddled and doesn't think 2-steps ahead, as it'll "somehow work out."

This loser generation is over-sexed, over-medicated, lacks in work ethic, thinks they're entitled and lost any desire to improve oneself. The American dream is no longer about buying a home from the money saved from a career in a job that you've done well, but about buying shit you can't afford with someone else's money. A friend of mine recently went to a restaurant who had a waiter in his mid-20's, who had graduated college and who was very grateful to have a job. He competed with 70 other candidates for the position. I respect this story as it's very telling for the trouble our generation is in. It's great that this kid is working as I respect industriousness over laziness and entitlement any day, but it reflects the declining value of our education and repercussions of a weak economy.

As long as the economy's chugging along, jobs are being created in innovative sectors such that the kids with no plans but college degrees can land into whatever happens to be growing. But when the economy shudders, the loser generation, who assumed it'll somehow work out, no longer as job offers from whatever's growing, because nothing is growing, and after spending 4.5 years draining their parents funds for college, end up back home . 1-step forward, 3-steps back. This also explains why unemployment for the young is something like ~20%+. I think this a good segway into why I turned to value investing in the next post.

Empire Building, Yogurt and Parenting

There was another life lesson from the food poisoning that's been resonating in my head that I didn't address in the last post but feel is equally important to my life trajectory. But before doing so I should provide some background.

People that work in the financial industry tend to get paid a lot. Whether or not its justifiable is an argument that exceeds the realm of my journal. While ultimately I do think it is justifiable due to some quirky laws of economics and psychology (scale and fear), from my perspective I'm already too biased to listen to, as "who's bread I eat, his song I sing."

But continuing about workbee's in the financial field, overtime you can make even more money if you can successfully compound. Obscene amounts of money or as the industry calls it, "fuck you money." This has raised my following internal struggle:

"If in 20 years I have 5X (X being whatever I need for retirement), why should I stay in the field?" I'm not saying I'm going to achieve this, as I readily recognize that I can be laid off tomorrow and start day 1 of a long career as an underpaid bank teller, but it is nice to think about the upside as well, especially when I spend most of everyday thinking about compounding.

While the obvious answer is that I'm passionate about the game and that alone will make it worthwhile, a secondary answer that's been building in my head for the last few months is that it's nice to build empires. It's nice to dream about how big and influential you can become. Wouldn't it be nice to create a company, charity or foundation that could last for generations? Hob nob with the rich and famous? Many choose this path, and given the Ritz and glam, it's understandable.

But then I got sick. Albeit, only a day or two, but it was enough open to my eyes a little. Late into the second evening of my food poisoning, my Dad came over and asked if Wife or I had bought yogurt for my stomach. The reason why I needed yogurt, as retold by a financial analyst who knows zilch about the human body, is that yogurt has good bacteria that I had lost with my food poisoning. Wife and I told him no, and he immediately left to Safeway (SWY, a cheap stock that I own with a cost basis around $19.50 per share) to buy 4 different varieties of yogurt.

It was an eye-opening moment. My dad is retired after a 30 year career as a psychiatrist. He now spends most days relaxing. Reading a good book, bike riding with my Mother, and watching whatever netflix (NFLX - an expensive) has arrived. He's enjoying leisure, and yet he's not looking to build an empire. He was there for me, when I needed him. He wasn't looking to build things he didn't need, he was looking to take care of the ones he loved. It was a moment I realized that I'd rather be the Dad who provides the invisible hand of a happy, and well-functioning family, than to strive to be an empire builder.

...

As I'm writing this, I'm in a rush to get over to my in-laws house for lunch when my Mom came in "asking for a favor". My immediate response, under the influence of being late and in a rush was "I can't right now as"...and then I thought for a second about what I'm writing..."I'm sorry Ma, what can I help with?" My Mom asked if I could try a french pastry she just baked for a party tomorrow and give her my opinion.

Wow. Maybe I need to spend some more time internalizing this post and less time trying to compound.

7lbs, Old Fears, and New Strengths

This past week was a little rough on me. Hours after my last post last Sunday, I started feeling the effects of what was my first experience with food poisoning. 2 days and 7lbs later, I was back in the land of the living, refreshed and equipped with a few new philosophies on life.

1. Ever since I was a kid (under 5) my greatest fear was losing my parents. This fear has compounded not only as they have remained consistently nurturing (and now to my wife as well) but I have also become closer with them over the years as they have evolved in my eyes from parents to people who had to make life choices. As an example, I am deeply in awe at how seamless their parenting felt as I grew up as they always offered the right cures for my maladies whether it was body, spirit or mind. There were a lot of bad detours I could have taken growing up, misinformed by the flexible morals of my peers or my own insecurities of youth, that was easily prevented by a few words of advice and encouragement from my parents. Now, as Jess and I think about having children of our own in time, I am deeply intimidated by all that I don't know which appeared so natural to my parents.

It doesn't help to have grown up somewhat unconventionally. I never really left home or tested my ability to become fully independent. I never needed to escape, when I knew how good it was here. Perfect weather, the culture and appeal of a major city, supporting family and a warm meal with TLC every Friday night. Would you really leave your own "Eldorado" for the sake of adventure and proving your own independence? I chose not to.

But the fear has remained that someday I will lose these monumental pillars and I will be left unwhole. This is an advantage my brother will have someday, as he has chosen differently, but until then I love the proximity. What I have recently learned however, is that while I certainly will be shaken when the darkness arrives, I hope to find solace in what I have created with my wife. And I have realized that this process of creation is the most powerful thing a man can do. Create. Create love, create a happy marriage, create children. My parents did this and that's what made them so strong in the face of struggle. These creations will be the new pillars in my life too. My old pillars are there too, I love my parents, but these new pillars, the warmth of marriage and the immense love in rearing children, will help me stand tall.

2. From a spiritual understanding this brings us closer to the Creator in my mind, as it allows us to partially comprehend the joy He felt upon creating the masses of this universe and the physical laws that govern it. This process of creation is a Holy light.

Month 1

It's officially been one month of married life and I've realized I haven't posted about the wedding. I have some notes that I scribbled on the plane flight to Maui which I will post at another time, but for now, I will just focus on just one word: evolving.

I've closed the page on a prior chapter in my life, and together, my wife and I have started a new chapter. The last chapter was about discovery. Discovering first loves and heartbreaks, first gains and losses, first jobs and new friends. It was a lot of firsts. It opened my eyes to how big the world is and how small I really am. It was about defining the goals for the journey ahead and it was about "Timshel". It was about saying, "this is my life, there's a lot of things I can do, but it's what I choose to do that defines me." I look back over the years and at my friends and loved ones, even the ones that I will likely never speak to again, and I say thank you. I am deeply grateful for the gifts they've given me in time, love and experience. It was an amazing chapter and they defined me just as much as I defined myself.

But I am also evolving. My goals and priorities are morphing. It's no longer me, my family and friends, but its my wife and I, my family and friends. I'm no longer hunting, but instead I'm farming. I'm now cultivating for the next generation. Pretending to act like an adult. Preparing for the unknown, unknowns that wait in this chapter and constantly, every day, striving to improve. Its time for my partner and I to do our best on what we choose to do. It defines us, together.

Frustruation Squared

Don't get me wrong, it's a good frustration, but its still frustration squared.

On the one hand I can't find very many stocks that trade under 8x FCF (I really only like to buy at 6x or under) but at the same time holding cash is not generating any returns.

Ugh.

The squared part comes from the fact that Ben Bernanke is doing everything in his power to reflate all assets by printing more dollars(while deflating the power of the U.S. dollar). I can't buy gold because it's against my discipline to buy non-cash producing assets, but its a little painful watching it go up everyday when it seems so obvious. It also doesn't help to watch my short position eating away at me. Bernanke's also buying long-term debt to keep the market interest rates artificially low. And he can buy as much as he wants because he can print as much money as he wants. Argh. I'm not finding cheap stocks, the recovery seems like a headfake, and junk bonds are yielding miniscule yields over risk-free treasuries.

What's an investor to do?

I think this is why investing is so freak'n hard. You need to have the discipline not to fuck things up. Not to want to buy just because Bernanke says that he's not going to let the economy double dip. Good luck pal, there are some forces beyond your control. I have to stick to my guns, my game plan, my strategy.

Wait, wait, wait, wait. Strike.

People panic. Mood's swing. Optimism fades to fear. In the next 3-5 years there will be opportunities for me to buy large positions in stocks trading at 6x FCF. Until then I just need to sit and wait.

You can't control the debt markets forever Bernanke, eventually they will control you.

"In 2009, hedge funds generated about 3% of trading volume in U.S. government bonds. This year, that share jumped to roughly 20%, according to consulting firm Greenwich Associates."

The sharks are sitting at the table. They will pounce when they're ready.

YTD: +1% (up 10% on the net ~10% long exposure established throughout July and August - but should I have put on more exposure / larger positions?).

Running on all Cylinders

It's my 4th week at the new job and while its still too early to call the "honeymoon" phase over, from what I can tell, I'm loving it. At times its almost too good as I've been very tempted to work on the projects from home. Maybe this is just the puppy love that accompanies any new relationship, but it's exhilarating. It's a different "exhilarating" then my prior investment banking work which generally was closer to "relief" that I could get the job done vs. the actual excitement of the work. The reason why I'm writing this post is because of the "hedonic treadmill" that we all run-on in life. I'm aware that like any other good thing, I don't want to take it for granted. In short, it would be a serious mistake if I woke up 6 months to 2 years from now and wasn't incredibly grateful for my current circumstances at work given what I could be doing.

Things to appreciate about the new job:

Waking up later helps me get more sleep. I used to wake up at 3:30 most mornings, now I get to wake up at 4:40. That's huge.

Shorter commute - Approximately 10-15 minutes vs. 20 - 40 minutes.

Constantly Feed - Breakfast and Lunch on the house everyday vs. rarely, if ever, treated at the old job. I also don't have to wait on any group orders.

No headaches (yet) - During my last month at the old job I literally got a headache nearly every day. It seemed like a physiological response that I needed to get out of there.

Better pay - 30%+ higher with the opportunity to hit my life targets in the next 10 years.

Better resources - Access to Bloomberg, sell-side research, transcripts, financial times, factset, wall st. Journal, Barron's, pretty much anything I could possibly need.

Calm and Patient Boss(es) - While I'm sure I will someday have a valuation disagreement with my boss, he is very considerate (as is most of the people I have met at the firm) and listens to what I have to say. That's not to say that everything will be rainbows and sunshine, but it's certainly not thunderheads on the horizon. At my old job I would be asked complex questions and would be cut off 5 seconds into a response. I would get yelled at for nothing. In comparison, my first week at the new firm, the founder had a meeting with the new guys (me and one other new hire) for lunch to get a chance to talk with us and ask questions.

Stimulating Work - This is my favorite part and I must never let myself take it for granted. Even if there are periods of pay fluctuation that are disappointing, this is by far one of the most important components to my professional happiness (2nd only to doing my best). Don't forget it.

Isocrates Quote

"Democracy destroys itself because it abuses its rights to freedom and equality. Because it teaches its citizens to consider audacity as a right, lawlessness as a freedom, abrasive speech as equality, and anarchy as progress."

My Dad's Office Quote

My Dad had the following hand-written quote (written by himself) framed in his office when he was a practicing physician:

"Creative thinking will also be blocked quite successfully by such factors as mental and physical exhaustion, petty irritations, noise, worry over domestic or financial matters, depression, anger or working under pressure. The Scientist must learn to design his whole way of life in such a manner as to protect himself against such sterilizing influences or he will not be able to succeed in his work, no matter how great his special talents may be."

- Hans Selye (a Dr. that studied the symptoms and coined the word we now commonly know as "stress")

I'm not sure 100% why, but it makes me proud that it's now sitting on my desk at home.

The Hunger

In that brief interlude between vacation and starting the new job, I felt the hunger.

It was a need to work. The feeling of getting work done. Completing assignments, tackling new ideas. Sure I can do investing on my own, but I needed to feel the demand. A boss requesting items. A "to-do" list. Yellow pads and stacks of paper. Time management, priorities and deadlines. Fear and greed. The heat. The discipline. The hunger.

I must remember this need when in the years to come, I don't feel like I need a firm to work for and should branch out on my own. Before I commit, I must ask myself if I can sustain this hunger on my own.

One of my top 10 worst trading days

Things are really starting to heat up in the markets. I don't have the screening tools I'd like as I'm in between jobs, but I've begun to start making some serious purchases in names I've been following for a few years.

Damn its stressful. I feel like I'm eating too much and my hair is shedding. I really need to get these habits under control otherwise I'm going to end up looking like jabba the hutt. Even when you have the conviction that you're right, the sheer volatility is nauseating. Welcome to the world of small-cap investing. Welcome to the world of opportunity. Tread carefully.

Today I bought some stock in an education materials company, RLRN. It fits as one of my typical plays (rock solid balance sheet, significant cash flows, strong insider ownership, recurring revenues, understandable business, diversified customer base, buying into extreme selling pressure) but I paid up for it (10x FCF vs. my normal 6x) mostly because of some timing constraints I'm currently facing. In retrospect I shouldn't have rushed it. Really dumb.

In the first hour the stock dropped significantly and by the end of the day it had closed ~13% down on no news. This decline equates to roughly half of one month's salary pre-tax.

While Mike Tyson would say, "everybody's got plans until they get hit," my plan is to triple the bet closer to $5-6 when I'm looking at a 50% drop from my purchase price. I just need the stomach to pull the trigger (and obviously quadruple check my assumptions and any news updates that would bust my thesis).

YTD Return: Flat.
% Invested: 12%
% Short: 4%

Marriage License. Gosh Darn, It Really Is About The Money

So earlier today Jess and I bought our marriage license for $90. We ordered it online and picked up at the court house in Beverly Hills. The whole time, Jess kept asking me if something was wrong cause she could detect I wasn't able to focus on the present excitement. No there's nothing wrong, and yes I'm very excited about marriage, but gosh darn, I can't get my mind off the market. My current puzzle is trying to figure out why my return this past month was only flat while also trying to dissuade a close family member from selling his large stake in GE stock.

As I've discussed in the past, my responsibilities as an investor has increased significantly over the last few months and its been incredibly challenging and rewarding. One the one hand, I'm wooping the market, on the other, its very, very challenging. My initial fund (less capital) was up ~6.5% through July this year. So from January 2008 through July 2010 (the total period of my initial fund), I was up 134%. During this same period the S&P 500 was down ~20% (an estimate which includes dividends). While this was a great run, it could have been much better had I also invested unallocated resources. As John Wooden would say, it wasn't a success because I didn't strive to reach my full potential.

Starting July I took on a greater role. I've made two moves that have worked favorably. First I quadrupled my short position (mostly to offset new purchases), and I also bought a spinoff (VPG at ~$11) which subsequently rallied 30-40% in a matter of a few weeks. VPG is doubly enjoyable as I also told a few people that I was buying it at $11 when it was still an opportunity for them to tag along (whether they did is I'm sure another story). Yet, despite two good bets, I'm only flat from July through today. So what am I doing wrong?

I know its a lousy ending to the post, but I still don't have a concrete answer. My initial takeaway is that I'm not making big enough bets to really make a difference (I'm only 15% invested including a 4% short stake) despite buying stock in 8 companies. Largely I think I need to get over the fact that I'm concerned the market could retest its March 2009 lows, which would create all the companies I'm currently buying 30% cheaper. Wouldn't you save most of your buying power for the lower prices, or do you just say, I know it's cheap here and I'm willing to buy 30-50% of a full position with the risk that I could have a huge paper loss in the months ahead? Tough choices. Do I potentially miss the upside (my VPG position could have been double its size easily) for an uncertain downturn?

Regarding GE, who the hell creates a marketing campaign suggesting that they're willing to make bad loans? That's just on top of the fact that if they're loan portfolio declines more than 10% the company is insolvent. Poor GE pensioners / employees, they would never know what hit them.

One of GE's recent ads below, and unlike the ad suggests, it is simply about the money.

Family Grillfest Toast

A toast from this past weekend at a delightful family grillfest:

Over this past year if you opened a newspaper or surfed a news portal, you were bombarded with unfortunate events. They ranged from devastating earthquakes to a record oil spill. The near term doesn't look that much brighter with rising crime, debt and taxes. Millions of unemployed face stiff competition for limited openings as our government faces tough choices to prevent its own insolvency.

Yet, despite this global adversity, which will inevitably impact all of us in some form, we have all been blessed with a record year:

Mr. & Mrs. Banrock are having a child, my brother and his fiance are getting married, and Jess and I are getting married.

Despite the adversity of the times, it is this merger and growth of our families that remains our true wealth.

It is a wealth that can not be taxed, spent or polluted.
It is a wealth that remains unadulterated whether we are employed or jobless, rich or poor, lost of found.
It is a wealth that grows or wanes based on the bonds we form and the love we share.
It is a wealth we must remember when confronted with the challenges of our lives and the noise of our generation.
It is a wealth I hope we all continue to grow in the years ahead.

It is this wealth that I toast to. To children, parents, wives, husbands, brothers and sisters. Or, just family, happy and healthy.

My Dreams, Why I Buy Stocks

I like buying stocks because it fits my nature as a social outsider / observer. I like buying stocks because I can make boatloads of money off of opportunities that everyone has (in the sense that it's publicly traded) but few have the temperament to execute on. I like buying stocks because it's scalable (unlike in poker where you can get pocket aces but no one calls your all in) and I can do it the rest of my life and actually get better each year (unlike nearly any physical sport). I like buying stocks because it forces me to learn about the world, the people running it, and the quiet unnoticed forces that influence billions of lives.

And should I be successful and make millions, what do I want to do with it?

I want to be a force for good. Yeah it's tacky, but honestly, I think giving money even if it's just $300K a year to poor people either in my direct community or abroad can make a freak'n huge difference. The other day Jess met a family of 6 (5 kids) that were living in a van down by my dry-cleaners. Imagine if I could give them an apartment to live in for a few years what difference that could make? Apartments in Hollywood can go as low as $12K a year. That’s 25 homeless families in rent-free homes per year. $300K goes even further in countries where people are living on less than $2 per day (i.e. I could feed 150K people for 1 day or 400 people for one year).

If I can amass $10mn the possibilities for good are endless. I can probably compound at 5% after-tax with little difficulty thereafter (assuming lumpy returns) or roughly $500K a year. Spend $200K on my family (if that), and the rest goes to improving the world. Maybe these are delusions of grandeur, but they are my dreams.

Marriage, Babies and a New Job

Jeezus our wedding is stressful and I'm not evening planning it. While Jess and I wanted to have a small, do-it-ourself wedding, Her Mother, who I love and adore, insisted on throwing an extravaganza. Up to 200 people and thousands of dollars for cakes, flowers, dresses, invitations, and food. Jeez, I don't even know 200 people.

It doesn't help that Her Mother doesn't have time to throw a wedding so the bulk of the responsibilities fall on Jess. And so Jess gets stressed out because she's building our home while also developing her graphic design business. So as more wedding work flows her way, a bottleneck occurs with current projects. Right now, for example, our kitchen is partially painted while the contents of the kitchen have been spread throughout the apartment. That said,the invitations got out this week. The kitchen has been and will be like this for the rest of the month which is partially a result of a recent vacation we took and one we are about to take.

There's also the human element. My parents, who's wedding consisted of less than 10 people and walking out of a dim sum restaurant, see the hoopla for the wedding and feel the pressures of keeping up with the "Joneses" to step it up for the rehearsal dinner. Now instead of subway sandwiches at the beach (something Jess and I advocated) where renting out a restaurant for the evening.

But these stressers are nothing compared to what Jess is experiencing. Her parents are divorced and some parts of the wedding have seemed like walking a mine field. The bio-dad wasn't there for Jess as a teenager, but Jess still wants to make him feel welcomed without offending her step-dad who is one of the coolest persons I've ever met. So bio-dad invited, but the mom walks Jess down the isle. Father daughter dance probably goes to step-dad, but not sure how that's going to work. I really don't care if bio-dad is offended by Jess' decision, he doesn't have to come if he can't behave like an adult.

In the grand scheme of things, these are all very minor frustrations from what they could have been.

While I recognize that it's slightly sacrilegious to discuss ex-girlfriends when thinking about wedding plans, I don't think I could have handled in-laws that would view me as damning their daughter to hell on top of everything else. I resented Diana for a long time for the ease in which she ended our relationship over religion, but in retrospect, she made the right decision for both of us, even if I wasn't emotionally prepared to accept it.

....

Wow, there's a lot going on right now and I even have the month off.

I'm getting married. My brother is getting married and Jess' brother is getting married. In all honesty it's kind of annoying how everyone is getting married at the same time as it feels like too much is being pact into one short period. I guess that just how life shakes out sometimes.

In the new additions to the family section, my asian-brother-from-another-mother is having his first baby and my private equity mentor is having his first baby. So exciting. I wonder what parenting thoughts are going through their heads? I wonder when Jess and I are going to have kids? It always makes me so excited when good people have children. It's like the inversion of the abortion / crime correlation chapter in Freakonomics.

Did I forget anyone?

My old college roomate finished his first year in med school and is going to move in with his girlfriend. Another friend from middle school and high school, Chris, just finished his second year at UCLA law and was offered a job at a law firm nearby. I'm actually proud of Chris. I've told him since middle school that he was a smart but lazy bastard and just needed to apply himself. After barely passing highschool he finally got the drift and is rocking out in law school. It really is amazing watching good people develop / grow up.

Anything else?

I quit my job last month after a terrible bonus. They gave me a 75% haircut from what I expected following a terrible 2nd quarter for the firm. Luckily I had a backup job already lined up with a hedge fund in Los Angeles. David Mamet once wrote, "I never tie my shoes without a backup plan." People laugh when I quote Mamet, but I believe him. I quit within 5 minutes of my bonus funding the next day.

While it doesn't hurt that the pay is 30-50% better, I'm more excited about the prospect that this new venture will be more inline with the life goal of spending my working day buying cheap stocks.

Disney

"Keep Moving Forward."

In times of extreme uncertainty this quote by Walt Disney helps me focus on the 1,001 daily tasks that have nothing to do with the uncertainty at hand, but have everything to do with continuing to live each day.

Trifecta

For the record, the earthquake trifecta test went off again indicating to me another big rumble for the future.

Aquarius / Let the Sunshine In

In life, there are some days that you just remember.

They are days when the stars line up and something memorable, expected or unexpected, happens. It's a day filled with defining moments, where all the stars feel like they've lined up in your favor, "Jupiter aligns with Mars," and you only have green lights in your future as your driving down the road of life.

October 23, 2006 was one such day. So was July 16th 2007, May 9th 2010, and today, July 8th 2010, my mother's birthday .

I'm sorry for the teaser as its time for bed, but I look forward to writing about it more in the future. I'll end the post however on an upbeat note:

"Let the sunshine in."

Quotes from the Grind

I was shocked one day when I heard this very wealthy, semi-retired salesman say this about his children:

"I love my kids, but I don't respect them."

He said it several months ago, but it has stuck with me as a reminder that no wealth can compensate for a disappointing household. It has also served as a reminder that perceived wealth is the ultimate corrupter of our youth.

The analogy my Dad likes to use is that if you have kids, and you have money, you shouldn't drive a nice car. Not because you can't pay for it, but because you can't afford it. It sends the wrong signal (or "data point" as my old NY mentor would say) to your children. Instead of learning about the hard work and discipline it took to earn the car, your children learn complacency and entitlement. And it's not like you just wake up one day, and find out that your children are brats. It takes years of constant reminders, cars, vacations, clothes, credit cards, phones... it all adds up to a bill your children ultimately pay as they struggle to adapt to a world without handouts or the required skills (industriousness and passion) to survive . That's not to say that you shouldn't have nice things in your life, but be careful on what you let your children see and experience.

My 2nd favorite quote, came much more recently.

With summer time comes summer interns. I was working with a summer intern who also happens to be a 30 something year old MBA student from one of the top 10 business schools in the U.S. I attempt to be a good mentor. I start by showing him how to do certain short-cuts in excel after he bungles a first, second and third attempt at putting together a basic financial overview. After about 2 minutes he laughs and says, "don't you see the humor in this," [I look at him quizzically] "Here it is, I'm 30 years old, and you're teaching me how to use excel."

Pause.

Great, lesson over. I can go back to my work and you can figure this shit out on your own.

Instead I responded, "when I started here I never used excel, so you clearly have the opportunity to learn a lot in a little time."

And oh, go fuck yourself.

Creak

The creaking in my apartment is starting to get a little unsettling. I'm sitting at my desk, and then I can hear a creak move across one wall, and run through the apartment.

Stormy Weather Ahead...

I would like to preface this entry by paraphrasing what WEB has already stated multiple times: I have no idea what the stock market will do in the near term (day, month or years).

That said, I'm currently working to prepare for a crash. I'm doing this because I expect it to happen soon, and I need to be prepared to act when the opportunities exist.

This means building a shopping list of ideas to buy at 6x or under free cash flow (its like buying a bond with a 16% interest rate that's either paid to me or is reinvested into the company) and finding companies that have the liquidity to weather a terrible downturn involving many years of stagnation or declining revenue. If the investment also happens to be a good company that's growing with high returns on invested capital, that's great, but I don't need to have it. If a stock doesn't have the two key qualities (low P/FCF and liquidity), I'm not interested.

While it is exhilarating, I'm a little drained mentally and emotionally as I've been working on this list in any free time I have (excluding time at work or with the fiance) pretty much for a month now (and less diligently for the last year).

Why?

My personal return in 2008 and 2009 was over 50% each year largely through a combination of good fortune and preparation. In November 2008, one idea that I had been following for a year fell in my lap, dropping 70% in 1 day on hogwash headlines. The market overreacted, and I put 30% of my assets in the stock. Other than this one pick, I effectively sat in cash most of the crash, with my eyes focused almost entirely on this one idea. In retrospect, while I beat the market, I did not succeed (a la Wooden - doing the best in which you are capable). Had I been better prepared I would have invested the remaining 70% of my portfolio in the opportunities available at the time which included some companies trading for 2-4x normalized free cash flow. Instead I froze. I had never made a bet so big and I needed inactivity.

This next crash I must be better prepared. I need more ideas and I want to be fully invested when everyone else is panicking. I need to emotionally brace myself for a down year as I average down into my cheapest positions. I've learned so much since then, and the stakes are so much higher now.

Lincoln's Career

As I was rereading one of John Wooden's books, I came across this passage on Abraham Lincoln's career:

Born 1809
Failed in business 1831
Defeated for legislature 1832
Failed in business again 1833
Elected to legislature 1834
Sweetheart died 1835
Had nervous breakdown 1836
Defeated for speaker 1838
Defeated for elector 1840
Defeated for congressional nomination 1843
Elected to Congress 1846
Defeated for Congress 1848
Defeated for Senate 1855
Defeated for Vice President 1856
Defeated for Senate 1859
Elected President of the United States 1860

"The model Mr. Lincoln gave us with his persistence is one we can remember in the face of our own setbacks. And what is most wondrous of all is that persistence is a quality that we ourselves control. You, and only you, can decide whether you will stay the course." - John Wooden

In Memory of John Wooden

"I am a biography nut myself, and I think when you're trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn better economics if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better in life and work better in education." - Charlie Munger (pg. 136 of Damn Right)

On June 4th, 2010, John Wooden passed away. While I am happy that he will be reunited with Nellie, his childhood sweetheart of 60 years, I am also sad and a touch scared.

In some ways its like building a bridge. Upon completion, you remove the support beams to see if it can stand on its own. My life was built on the collective wisdom of a few role models, and when they pass, as they will in time, I must stand on my own, in living and practicing their life lessons.

Below are a few of my favorite quotes or writings of John Wooden:

"I am just a common man who is true to his beliefs."

"I am happy my teams at UCLA and elsewhere did well and we earned a measure of recognition. But all of this is nothing compared to my family: Nellie, our two children, our seven grandchildren, and all ten of our great-grand children. All that love is immeasurable."

"True success is attained only through the satisfaction of knowing you did everything within the limits of your ability to become the very best that you are capable of being."

Remember this your lifetime through -
Tomorrow, there will be more to do
And failure waits for all who stay
With some success made yesterday.
Tomorrow, you must try once more
And even harder than before.

How much more pleasant this world would be if we magnified our blessings the way we magnify our disappointments - Unknown

No written word
nor spoken plea
Can teach our youth
what they should be.

Nor all the books
on all the shelves.
It's what the teachers
are themselves. - Unknown

"I have prepared for death all my life by the life I lived" - Socrates

Proposal

This is just the beginning of a very interesting, and exciting time. I think one of the parts that I like the most about this new chapter in my life is all the life advice and feedback from family and friends. So far (and what I hope to be just the beginning):

The Dad - "Don't f*** it up"

The Mom - "Before I say yes, there are 3 things I want you to do: 1) be her "champion" 2) Don't let fear prevent you and her from living life or trying new things and 3) Don't stick to the conventional advice of others, this is your life, you should do what works for you."

The friend from high school - "I'm surprised she said yes too!"

My Psychologist / Jedi / Trader Mentor - "So this means she has 24 hours to shop for competing offers?"

My old private equity boss and friend - "Don't do it... just kidding"

...

CM - On Courage

Perhaps my favorite quote from the meeting:

"I developed courage, once I learned I could endure hardship." - CM.

Munger - Opportunity Cost

I went to the annual Berkshire and Wesco meeting this year, and while I'm not going to try to summarize 10 hours of learning right here, there were several quotes and analogies that just lit my brain on fire. It almost feels like those Japanese Anime super heroes that power up to discover new powers and strengths.




One analogy that CM gave on opportunity cost was incredibly powerful to me. After Berkshire bought $300mn of BYD (Chinese electric battery / car company) and the stock has proceeded to rally ~400%, CM has gotten several solicitations to consider investing in other Chinese companies. Your logical instinct should probably be that after this initial success he would be all over any potential Chinese ideas. But its the exact opposite!

CM, indicated that he wouldn't even looking at them, just given that the opportunity cost was so high given that he liked BYD, the product, the management, even though it had traded up 400%! He had more faith in BYD growing over time, (and had already done the work) than considering other investments!

It doesn't make 100% sense to me (as I'm younger - mid-twenties vs. 86 and try to be constantly looking at new ideas), but it's something I've been reflecting on, when considering potential investments (i.e. does this meet the opportunity cost? Even better, does it raise the opportunity cost for future investments?).

How Not to Finish the Game...

6th Inning (February 1999):



7th Inning (autobiography - where this blog got its name - November 2003):



8th Inning (At the Citi testimony before the Financial Industry Inquiry Commission explaining why Citi needed $45 billion in bailouts and $300 billion in tax payer guarantees under their watch - April 2010):

Wip-Saw

S&P 500: 1,128 (only -3.24% after falling intraday over 8%)

I'd be lying if I said I didn't have the evil "muah haha" laugh in my head today as I watched my short position lurch 8%+ today (and ultimately pullback). I don't expect tomorrow's performance to be anything like today, and if I had to bet on a direction I'd probably say up.

That said, to paraphrase WEB, I have no idea what the market will do in the next day, month or year. The game I play, is that I look for small, cheap companies at 10x or under free cash flow (mostly looking at companies under 6x free cash flow unless management is active in paying out the cash or it's an amazing business) that make a lot of sense to buy and don't warrant the corresponding 10% yield equivalent. There's less competition and the returns can be disproportionate with the uncertainty taken.

Parabolic

Since I wrote my last post, the markets have effectively gone parabolic causing one of the quickest losses I've ever had and I still haven't closed the position!

Admittedly this is one of the dumber trades I've done from a risk reward stand point given that I usually invest in situations where I have at minimum 50% upside.

In this case, what's my upside, 20%? 30%?

Dumb trade. The worst part about it, is that I knew, wrote and spoke against my betting against the market. Don't do it. Don't fight it. "The markets can remain irrational longer than I can remain solvent..."

In the last 3 years I've had 3 bad trades out of 11. Two of which were from betting against the f'ing market. Of my total loss amounts over 99% have been from these 2 bets.

GAAAAAAA!!!!! I'm a security analyst. Not a market timer.

2010 YTD Return: ~2%.

Tripled My Short

While I'm not betting against the long-term fundamentals of the U.S. economy, I tripled my bet against the market today for the following reasons (in no particular order):

1. The P/E10 Ratio (a 10-year avg. of the S&P 500's earnings divided by the current price) is in pricey territory:



http://dshort.com/articles/SP-Composite-pe-ratios.html

2. It's a hedge against the long positions already established (25% net invested mostly Berkshire, American Physicians, Fairfax)

3. Commercial real estate is an easy catalyst leading to bank mark downs, and further credit reductions).

"Between 2010 and 2014 about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present "under water"- that is the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates which now range from 8 percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined by 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties."

4. The fed recently stopped buying mortgage backed securities. This has provided a steady demand, which has kept yields artificially low.

5. PIIGS (Portgual, Italy, Ireland, Greece and Spain) Headline Risk - Paul Krugman's excellent article here.

6. Several investors I read are even more pessimistic.

Bill Gross

John Hussman

David Rosenberg (but he's been way to early, starting May 2009 - then again so was I).

Lucky Coinflipper?

As of 4/4/10:

Creaking

With all the creaking, it's almost as if my apartment is reaching out to me, saying... "earthquake"...

Skies of Blue

Recently I've been reflecting on my favorite things in life and what I consider the defining activities that make my life what it is. This helps me appreciate how much and how little is actually within my realm of control. For example, while I have my day job, it really has no bearing on how I feel towards each of these items (which is in my control). If you take it a step further, the job is just a means to participate in these activities, just like any other job. While it's a simple conclusion, it has been helpful for me to keep life in perspective, compartmentalizing the frustrating or stressful tasks from the activities that define me. It has also helped me realize how few material things I actually need or even want. And lastly, it helps me realize that if I were to die before my time (which I'm certainly not expecting, but do occasionally reflect on), that I am grateful to have still lived my life.

This list is not intended to have any meaning to anyone other than myself, as I think each person has to choose their own defining activities.

In no particular order:

Family meals. My own home. Exploring new adventures with Jess and friends. Jewish traditions. Researching unlevered companies that generate significant cash flow. Eating delicious foods. Restful sleep. Staying healthy. Playing cards with friends. Cooperative video games. Mini golf. Jacuzzi time. Walks on the beach. Hikes. Sunsets and sunrises. Listening to music while driving with the windows down. Thought provoking books and conversation. Living in a town with beautiful weather. East Coast vacations. Violin. Imaginary stories in my head.

And a few that I have yet to experience:

Good husband. Good dad (teach kids to be good and add value to world). Walk my own obedient dog.

Too much Dexter?

After a hectic weekend, I told Jess today that I was looking forward to having sometime to myself to relax.

"I don't kill people, I just read."

Life Addictions

Due to her ability to get me hooked onto television shows, I’ve recently started calling Jess my “drug dealer”. It usually starts with me walking by her desk, the volume isn’t even on, but something on the screen catches my eye. For example, about two weeks ago, I walked by and saw a naked chick getting strangled by the Ice Truck Killer a la Dexter Season 1. Upon seeing Jess watch what appears as porn as I walked by, I then walked back. My initial reaction was somewhat like George Bailey in It’s a Wonderful Life, when he realizes that he stepped on Mary’s robe and she’s naked in the bushes.... “Hmmmm…. A man doesn’t get in a situation like this every day.”

…

A week later and I walk up to Jess and tap my inner arm and say “I need the good stuff.” With Netflix I can get my fix of season 1 or 2 of Dexter at anytime online. It used to be Heroes but the show doesn’t give me the high I need anymore. On Friday we finished Season 2 of Dexter in a 4 hour marathon session. I started thinking of a 12 step program for my dark demons when I got an email from Kelvin…

…

In the last 24 hours, I’ve played 5 games of Craps on my iphone due to Kelvin’s recommendation. I won $300 (fake dollars) in one, won $100 in another, and crapped out in the rest. Just enough of a net win to keep me going into the next week.

With friends like these, who needs enemies?

Surrogates

Maybe I'm just easy, but Surrogates just blew my mind.

It raised a lot of thought-provoking questions (would you have sex with a robot? As a robot?) and also had a iRobot like story.

The ending also wrapped everything up so nicely.

Man, that was awesome.

I haven't been this pumped after watching a movie since I saw Taken.

Dealing with Death

As a follow up to the last post, below are two excerpts from When Bad Things Happen to Good People by (Harold Kushner) that help me grapple with premature deaths:

"If the bad things that happen to us are the results of bad luck, and not the will of God, what makes bad luck happen?" I was stumped for an answer. My instinctive response was that nothing makes bad luck happen; it just happens. But I suspected that there must be more to it than that... Can you accept the idea that some things happen for no reason, that there is randomness in the universe? Some people cannot handle that idea. They look for connections, striving desperately to make sense of all that happens. They convince themselves that God is cruel, or that they are sinners, rather than accept randomness. Sometimes, when they have made sense of ninety percent of everything they know, they let themselves assume that the other ten percent makes sense also, but lies beyond the reach of their understanding. But why do we have to insist on everything being reasonable? (pg. 46)...

Laws of nature do not make exceptions for nice people. A bullet has no conscience; neither does a malignant tumor or an automobile gone out of control. That is why good people get sick and get hurt as much as anyone. No matter what stories we were taught about Daniel or Jonah in Sunday School, God does not reach down to interrupt the workings of laws of nature to protect the righteous from harm. (pg. 58)

The Unknown, Unknown

Every few months I get the itch to change the name of this journal to reflect the current flavors in my life. But then, about just as often, something completely unexpected, an "unknown unknown," or a blackswan, enters my life. It's usually after the initial suprise, or"holy s#$%!" phase wears off, that I remind myself that: "we live in an uncertain world." It's not a judgment about good or evil, right or wrong, but a mantra that alleviates the echoing questions in my mind and helps me accept the randomness in life.

I found out today that a family acquaintance passed away unexpectedly on Friday. He was a year younger than me (~23 yrs old), a friendly trumpet player in the high school marching band, and died from complications associated with his diabetes. I am both shocked and saddened by his death.

We live in an uncertain world.

Life Choices...

In every life we much choose between the following two philosophies as presented in the following quotes:

“I swear by my life and my love of it that I will never live for the sake of another man, nor ask another man to live for mine.” - Ayn Rand (John Galt's Oath from Atlas Shrugged)

Vs.

"Then I grasped the meaning of the greatest secret that human poetry and human thought and belief have to impart: The salvation of man is through love and in love. I understood how a man who has nothing left in this world may still know bliss, be it only for a brief moment, in the contemplation of his beloved." - Victor Frankl (Sharing how he survived Auschwitz from Man's Search for Meaning)


...

I don't think Ayn Rand knew what she was missing.

Aaaah Snap....

In finance they have a saying, "you're either quick or you're dead."

In poker, the winner usually has some combination of favorable luck and excellent snap judgment ability.

Snap judgments are also critical in countless other tasks - Gladwell practically wrote a whole book about it. Yet, in life, people call me "judgemental" or say that I "generalize" as if it's a bad thing.

huh?

People generalize, because their generalizations are generally correct. Why are snap judgments about life (and people) a bad thing, when it's a critical skill set to almost everything else you do?

Holiday Season

Just finished a wonderful 8 nights of Channukah with Jess and my folks. Lot of oily latkes and cheesy gifts. While I asked my folks not to get me anything this year, my parents bought me an Enervive machine after Mom saw an infomercial on HSN. The purchase reflects many aspects of my life. My parents are very loving, and even if they know I'm not really looking for anything (other than free time) my family still likes to try new and silly things. The Enervive is a battery powered machine with two paddles you place on a tense part of your body (lower back) that sends electric pulses that cause you muscles to involuntarily spasm, yet relax at the same time. Needless to say, after several glasses of wine, we we're all laughing around the table thinking about this goofy contraption and pretending like you could hook it up to your head to turn on electrical appliances. It was fun, and I'm glad Jess understands how my family works and is also eager to join it.

So while Jess and I are enjoying the holiday cheer,(it's hard not to given that the winter flavors at starbucks are back), recently I've been wondering as I look to extended family and colleagues, why can the holiday season bring out the worst in people? While I don't have a grand thesis on it, I think the heart of the issue comes from the idea of spending money you don't have on gifts that may not be appreciated.

But then again, I think back to the enervive, and while fortunately my parents can afford a silly toy and I don't think that my Mom meant for it be appreciated as a party gag, maybe the real issue is that gift giving forces people together. And you if can't appreciate your family and friends, it doesn't matter what toys you find under the Christmas tree this year.

Poker, Investing and Market Follow Up

1. One of the many parallels between poker and investing is the rhythm in betting. For example, in poker I'm constantly adjusting my style to the position, or where I sit relative to the dealer. For example, if I'm first to bet, I'm less likely to play aggressively given that I'm uncertain on how the other players feel about their cards. In short, it's foolish to make a strong bluff, when any one of the nine players ahead of you could have stellar cards. That's the point of playing position, you're constantly monitoring the flow of information from other players. Maybe Mr. Alligator Blood quickly called the bet from the drunken roommate, so maybe I shouldn't raise pre-flop.

In investing, similar to knowing your position in poker, you must know where you are relative to the general market. The more bullish the crowd, the more bearish get. It is for this reason that after a 60% rally, I don't go "guns blazing" into any investment. I currently sit with a 5% short on the market, 5% long Berkshire, and 90% cash.

Another similarity between poker and investing is the discovery process of the fulcrum security. For example, during a contentious bankruptcy usually there's a valuation fight where creditors argue for how much debt the underlying company can support. This is a critical process because it frequently determines which lender gets the post-reorganization equity, and which lender gets nothing. The lower you are in the company's debt structure, the less likely you get a pay day.

In poker, I like to think of the fulcrum security as the minimum bet necessary to cause the other players around the table to question what they have with the goal of having them fold. What's fun about this is that it's a constantly evolving discovery process. While usually I think the fulcrum bet is somewhere between 5 to 10% of the initial buy-in, it can vary based on how long the game has been playing, the amount of alcohol consumed, the familiarity of the players and countless other factors.

Anywho, those are just my random musings on cards vs. investing, and that said there are many differences between the two that need to be appreciated and will be discussed in the future. Until then one of may favorite quotes that captures the difference is from a recent Bloomberg article: “In poker, people are used to not sitting back and waiting for the fat pitch...they’re used to skirting the edge of ruin and they learn the tools of how to do that.”

2. To follow up on my last post on shorting the market, I've settled on not betting. While I have strong conviction that we are due for a near-term pull-back, the risk return profile (like pot-odds) totally isn't worth it. For example, how much can I profit from betting against the market? In all likelihood the range is from 10-30%. Given that I almost never buy stocks with only a 30% upside, why should I make an exception for shorting the market? The answer is that I shouldn't. Despite the frustration of sitting on the sidelines (much like the frustration of mucking a lot of bad hands), a full chip stack is worth a lot more when everyone else is panicking.