Monday, October 30, 2006

Bill Miller's 3Q 2006 Commentary

Bill Miller's latest commentary came out last week, peppered with the usual references to philosophers from the 19th century and, of course, references to our friends WEB and Charlie Munger.

Fun on price and value:
Since more things can happen than will happen, if we can identify where our expectations differ materially from those embedded in market prices, we can construct portfolios that we believe will earn higher risk-adjusted rates of return over time than could be earned by a passive investment program.

This involves always keeping in mind a basic business principle: only compete where you have a competitive advantage. Warren Buffett refers to staying within your circle of competence.
And on the ways to make money in the markets, with a bonus shout-out to behavioral finance:
In markets, competitive advantages are three: informational, analytical, or behavioral. Informational advantage is when you know something material that someone else doesn't. It is the easiest to exploit and the hardest to find ... Analytical advantages come from taking publicly available information and processing or weighting it differently from the others ...

Behavioral advantages are the most interesting because they are the most durable. The field of behavioral finance is still in its infancy yet has already yielded results that can be incorporated profitably into a sound investment process. The best part is that such results are likely to be systematically exploitable and not able to be arbitraged away as they become more widely known. That is because they represent broad findings about how large groups of people are likely to behave under well-defined circumstances. Until large numbers of people are able to alter their psychology (don't hold your breath), there is money to be made from prospect theory, support theory, cognitive psychology, and neuroscience.
Miller's key point: ask yourself why you think the way you do. Question your assumptions, but also your own mindset and temperament. Examine the glasses through which you see the world - you might be surprised that the glasses, not the world, are what's affecting the view.

Monday, October 16, 2006

Flirting with 100 Grand

Shares of Berkshire Hathaway have seen a recent runup after emerging unscathed from an mild hurricane season. The stock recently surpassed the $100K mark in intraday trading. As an interesting side note demonstrating the deception of a price-weighted portfolio vs. a value-weighted, the DJIA would look substantially different if it included BRKA. Meanwhile, the S&P 500 is still 10% off its all time high.

WEB recently made a trip to Israel to visit his recent $4B acquisition, ISCAR, a world leader in metal working and metal cutting tools. Berkshire has shown interest in acquiring another large utility and is rumored to be seeking a position in China's Merchants Bank, news of which sent the shares skyrocketing. Berkshire's latest SEC filings reveal that the company has sold or reduced positions in GPS, LXK, HRB, and OSI and has bought shares of JNJ and USG. Also, amid recent scandals at Hewlett-Packard and UnitedHealth, the chairman reminded his top executives of the importance of strong corporate governance practices.

After giving GSB students a ride to Gorat's Steakhouse during our last visit, Mr. Buffett decided to auction off his Lincoln Town Car--the one with the license plate reading "THRIFTY". The winning bid was $73,200 on EBAY. That same week Buffett was involved in a minor fender bender when he was rear ended in his new 2006 Cadillac on his way to pick up fast food at Bronco's Burgers. Also, pro basketball's LeBron James was a recent guest of Buffett's for lunch in Omaha.

And finally as a follow up to last year's best-selling "The Little Book That Beats the Market" is the latest "The Little Book of Value Investing" by Christopher Browne (of Tweedy Browne) with forward by Buffett biographer Roger Lowenstein. The book's 16-point checklist helps investors examine a company's prospects.

Oh, and I almost forgot. Congratulations Warren and Astrid on your recent wedding!