Category: 1

Dear fellow Business Owners

I attach with this e-mail a link to an article recently written by John Bogle,  of which a op-ed essay also appeared in the The Wall Street Journal a few weeks ago.   It is,  in one word, excellent, and a definite must read.

The Culture That Gave Rise To The Current Financial Crisis

http://johncbogle.com/wordpress/wp-content/uploads/2009/05/ncctempleton.pdf

Why do I send these e-mails?  Why do I take the trouble to send this to people I don’t even know personally.  Maybe because I am also “old fashioned” in the values I believe in.  Maybe because I believe in the principle of “a good” society.  The small number of people on this list  are people who I believe have ethical values and is not scared to stand up and be heard in public.  We need more of this in  modern society.  We need to change the belief of managements that they can do what they want without the consent or knowledge of shareholders,  who are after all,   the ultimate risk takers and true owners.

Culture will only change if  society looks down on bad  behavior.  Name it and shame it,  will always be effective, far better than more regulation,  but then society as a whole must unite against such bad behavior.  There needs to be more people who stand up at annual general meetings and challenge the decisions of management if the board does not do its job properly.  The journalists and media then must not write articles to ridicule the actions of such activists, but support it, and then maybe, just maybe, we can start changing the culture, because managements and boards will only change if they think and see that society demands it.

But maybe I live in a dream world.

Dear fellow business owners

I am busy reading the newest edition of “Security Analysis”, a book I am sure are well known to all of you as people who share my beliefs about investing in common stocks.

I don’t know if any of you have read the latest edition, but if not,  please take the time to read the “Introduction to Part V, the Quest for Rational Investing”  written by Glenn H. Greenberg of Chieftain Capital Management.  I think it is a brilliantly written piece which I think (hope) all of you would enjoy too.  The online copy can be read here, from page 395.

http://books.google.co.za/books?id=-SVwCBG5ZiwC&pg=PA397&lpg=PA397&dq=chieftain+capital&source=bl&ots=Y_D5_5Roo3&sig=Xy18Cx4Vyxeeo0kpZzG8gEW1O2Y&hl=en&ei=PzoFSsGsLtCZjAfPvfHYBA&sa=X&oi=book_result&ct=result&resnum=3#PPA395,M1

A lot has been said recently about excessive management pay and the pitfalls of option schemes.  I think,  and believe it is all about getting the incentives right for management, but more importantly, for outside minority shareholders as well.  The following article provide some good concepts for thought, and of course the remarks from Warren Buffet and Charlie Munger is as invaluable as always.

“Generally speaking, in life you get what you reward for.  If you want ants to come, you put sugar out.” (Charlie Munger)

CEOs Need to Bring Investors Along for the Ride ,
http://online.wsj.com/article/SB124121294473578541.html

And also Warren Buffet on the subject …

Berkshire Weekend: Buffett, Munger on Setting CEO Pay
Liz Claman of Fox Business Channel quotes or paraphrases the Berkshire chairman and vice chairman:
Question: If a board of directors makes a mistake with compensation – then the board issues incentive bias toward earnings manipulation. Bearing in mind rule number 1 – don’t lose money and if it’s okay to have losses in short-term if loss is widens. How do you develop a fair compensation for a subsidiary that requires a lot of capital?
Buffett: We’ve thought a lot about this. In a capital intensive business you have to have a factor in a compensation arrangement that includes a capital -cost element. We have dozens and dozens of subsidiaries and we have different arrangements for different businesses because businesses that don’t require capital like See’s and Business Wire are different than businesses that requires lots of capital.
I think your question implies that the board sets these thing. But in my experience – basically the board is having relatively little effect on it. The CEO has managed to be an important determinant of his or her own compensation arrangement. I’ve been on one comp committee of 19 boards… CEOs appoint the comp committee – they don’t look for Dobermans, they look for Cocker Spaniels. In my experience boards have done very little in the way of really thinking through as a owner about “what is the proper way to pay these people and incentivize them not to do the wrong thing?”
Not every CEO wants a rational compensation system. It’s a real problem. I don’t think there should be a compensation committee. I think it’s very important how you compensate the CEO. I said in our annual report – choosing the right CEO, making sure they don’t overreach…
Munger: I would argue that a liberally paid board of directors is counterproductive. You keep raising me and I keep raising you. It gets very club-like. I think corporations of America would better married if directors weren’t paid at all.

I try to identify trends to trade on multiple time frames.  It can be either to the long side or the short side.  For example I believe in the long term fundamentals of UEPS, a company I have been following for a couple of years.  I hold a core portfolio of their stock in a long term account here in SA.  Then I also have a trading account in the US with Ameritrade where I try to trade the swings in UEPS and other stocks.

I also hold an account with Interactive Brokers in the US where I trade my day trades in stocks and futures as well as forex.  Currently I focus on the short side of trades in the commodity sector, especially steel stocks and iron ore stocks, as I believe their fundamentals are fading.  I base my views on research of historic price trends combined with current news flow regarding the industry fundamentals.

See below graph for  historic prices for both Iron Ore and Coal.  If this does not look like a bubble for a commodity, then I don’t know how one looks like.  Also,  I have read research by a leading Asset manager here in SA that at current prices for both these commodities, the payback time for capital costs is 12 months, so that should encourage a lot of extra supply very quickly.

iron-ore-coal-price-trends

I’ve added a pdf file of the South African house price growth , nominal vs real, for the past 40 plus years since 1966.

Interesting reading

sa-house-prices-nominal-vs-real

Thorsten Polleit  of the Ludwig von Mises Institute ,does a very good job of explaning,  with examples of simple balance sheets, what the current actions of the US Government in bailing out Wall Street are doing to its citizens.

The article is not specifically aimed at the US government, but rather in general, but you can put in your favourite government as example.

We currently find ourselves in a situation Ludwig von Mises warned against:

The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application, and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse. In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about.[2]

He recons there is no escaping the eventual price that will have to be paid, the only question is how high that is going to be, and quotes von Mises ,

The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

I certainly don’t hope my children would have to bear that one day.