Interesting Reading – November 25, 2016

Published on November 25, 2016

In this series, we suggest worthwhile reading material on a variety of topics, not all of which are directly related to investing.  

The Big Short: Is the next financial crisis on its way? – The Guardian, November 19, 2016.  Steve Eisman is best known for his correct bets against the subprime housing bubble leading up to the financial crisis.  He now believes that European banks, particularly in Italy, are in big trouble.  “Europe is screwed. You guys are still screwed,” says Eisman. “In the Italian system, the banks say they are worth 45-50 cents in the dollar. But the bid price is 20 cents. If they were to mark them down, they would be insolvent.”

Is Indexing Worse Than Marxism? – The Wall Street Journal, November 24, 2016.  Burton G. Malkiel, who is very well known for his book, A Random Walk Down Wall Street, takes on critics who are claiming that index funds pose grave dangers to the stock market, the overall economy, and perhaps to capitalism itself.  Mr. Malkiel acknowledges that an efficient market requires some active traders who analyze and act on new information but suggests that the proportion of active managers could shrink to as little as 5-10 percent of the total and still provide sufficient efficiency.

Faith, Feedback and Fear:  Ready for the Valeant Test? – Musings on Markets, November 22, 2016.  NYU Professor Aswath Damodaran recaps the past several months at Valeant and revisits his investment thesis that led him to purchase shares at $27 in May 2016, a time when his analysis led him to believe that the intrinsic value of shares was $44.  Although recent events have reduced his intrinsic value estimate to $32.50, the share price has also declined.  This led Prof. Damodaran to double his Valeant holdings at $15.  His article follows news of Lou Simpson’s exit from Valeant in the third quarter.

How Two Trailblazing Psychologists Turned The World of Decision Science Upside Down – Vanity Fair, November 14, 2016.  Amos Tversky and Daniel Kahneman are best known for their groundbreaking research in the field of behavioral economics, much of which was set forth for popular audiences in Daniel Kahneman’s recent book, Thinking, Fast and SlowIn this article, adapted from The Undoing Project:  A Friendship That Changed Our Minds, Michael Lewis discusses the evolution of thought, research, and experience that led to breakthroughs that would forever change how economists view real world decision making.

William Ackman’s 2016 Fortune:  Down, but Far From Out – The New York Times, November 15, 2016.  Bill Ackman’s Pershing Square is on course for a second year of double-digit annual losses, but many big investors believe that his firm will turn the corner.  Mr. Ackman’s most prominent mistake has been Valeant Pharmaceuticals which has plunged over 90 percent from the average of $190 that Pershing Square paid to acquire a big stake in 2015.  Mr. Ackman has secured two board seats to influence a turnaround strategy.  More recently, Mr. Ackman has acquired a significant stake in Chipotle Mexican Grill (see also New York Times article on November 18 and The Rational Walk’s recent coverage of Chipotle).

Bonds Down, Stocks Up! – The Brooklyn Investor, November 22, 2016.  The Brooklyn Investor explores the relationship between interest rates and equity prices over many decades along with the implications for equity valuations in periods of rising interest rates.  Since the presidential election on November 8, interest rates have risen quite sharply while stock prices have also rallied.  In theory, higher interest rates should act as a downward pressure on equity valuations, but this relationship is not precise and also depends on whether the stock market ever completely “priced in” the period of abnormally low interest rates that have prevailed since the financial crisis.

Warren Buffett’s Meeting with University of Maryland Students – By Dr. David Kass, November 20, 2016.  Warren Buffett met with twenty students from each of eight universities on November 18.  During the session, he responded to twenty student questions over a period of 2 1/2 hours.  The questions range from politics to economics to questions about specific investments such as Berkshire’s recent foray into airline stocks.

The Money Management Gospel of Yale’s Endowment Guru – The New York Times, November 5, 2016.  David Swensen runs the $25.4 billion Yale endowment which is one of the largest in the country.  Mr. Swensen is best known for pioneering an investment strategy that includes holdings in real estate, private equity, and venture capital along with other alternative investments.  This is in contrast to the more typical stock and bond allocations common in endowment fund management.  Mr. Swensen took over management of the $1 billion endowment in 1985 at a time when it provided 10 percent of Yale’s annual budget.  The endowment provides 33 percent of the budget today.  In this article resulting from a series of interviews, Mr. Swensen provides insights on active vs. passive management, activist investors, and his experiences during the financial crisis, as well as many other topics.

Like Buffett, Another Folksy Investor Turns Patience Into Profit – The Wall Street Journal, May 22, 2015.  Jason Zweig shares his experiences covering the 2015 Markel Corporation annual meeting in Richmond, Virginia.  This article, focusing on Markel’s co-CEO Tom Gayner, might be of interest to readers who have been following The Rational Walk’s recent coverage of Markel.

Quit Social Media.  Your Career May Depend on It – The New York Times, November 19, 2016.  Cal Newport, who describes himself as a “millennial computer scientist” and author makes the case against the use of social media.  Although his complete absence from social media may be considered extreme, the author’s warning regarding the risk of distraction warrants consideration:  “Consider that the ability to concentrate without distraction on hard tasks is becoming increasingly valuable in an increasingly complicated economy. Social media weakens this skill because it’s engineered to be addictive. The more you use social media in the way it’s designed to be used — persistently throughout your waking hours — the more your brain learns to crave a quick hit of stimulus at the slightest hint of boredom.”

Interesting Reading – November 25, 2016
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