Mauboussin on Strategy: The Failure of Arbitrage

Michael Mauboussin's latest article about "The Failure of Arbitrage - Leverage, Liquidity, and the Persistence of Inefficiency".

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There is solid literature on the limits of arbitrage under normal conditions, when arbitrage opportunities tend to be steady and small. 15 Our emphasis here is on the failure of arbitrage in periods of financial crisis, where price-to-value gaps are wide and investors can put substantial capital to work at attractive returns. In financial stress, we see:
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Related Links :

• The Failure of Arbitrage (PDF)
• Podcast (MP3)
  

Markel Annual Meeting notes

Key Takeaways:

• (1) Chief Investment Officer Thomas Gayner called the current environment the best he's seen in his 18 years at Markel for buying best-of-breed companies at a discount. Pretty strong words from him there.
• (2) Steve Markel thinks Markel should be valued at 2x Book Value. At the current book value (as of 3/31) of $263 Book value, that puts shares at $526.
• (3) The culture at Markel is extremely strong. The employee owners (we call them that because they actually buy shares on the open market) are bought in to what Markel is doing. That is an incredible advantage for an insurer, or any business.
• (4) Thomas Gayner thanked the underwriting side of the business when he first got up, saying he understands how hard it is to have such discipline and generate the money (float) that his team gets to invest. Their top investing priority is not to lose it.
• (5) Thomas Gayner also said that bad times will always come and go. There have been many times in the past when people have predicted the worst (food and energy crises, runaway inflation, economic depression). It usually doesn't happen. :-)

Direct Link - Markel Annual Meeting notes.

Whitney Tilson and John Heins : Fixes for Bad Timing

If you're able to look beyond near-term trouble, you have an advantage over many professional investors.

Investing too early is one of the more common sins of value investors. Watching as that well-researched idea you loved a few months ago falls 20% to 30% can be painful and nerve-racking. Bruce Berkowitz, of the highly successful Fairholme fund, calls it "premature accumulation."

Getting your timing wrong is inevitable -- especially in today's market, in which stock prices continue to plumb new depths in a wide variety of industries. Value investors like us can be particularly susceptible to bad timing because we often buy on bad news or bet on turnarounds -- both of which have the unfortunate habit of dragging on much longer than expected, often causing share prices to continue to decline.

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Direct Link - Whitney Tilson and John Heins : Fixes for Bad Timing.

David Einhorn - Greenlight Capital 2008 Q1 Earnings Call Transcript

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David Einhorn : Yes, certainly. Metals are interesting in the sense that a lot of people view them as stores of value so as to replace – they fight the weaknesses in things like paper currencies, and view these things as stores of value and own them for diversification or because they think that they will do well as a result. My own personal bias on the matter is that gold, like anything else, does not have an intrinsic value that is any different really from paper money other than the sense that you could use it in jewelry or electronics, and so forth. And as a result of that, it’s like the paper currencies, is also worth whatever everybody agrees that it is worth.

So it’s very hard to understand sort of a non-speculative case for why somebody needs to invest in gold or precious metals as a diversification away from currency that has its own issues and problems. I know that’s probably not a popular majority opinion. I don't think it particularly harms us in the sense that on the worst day it’s a missed opportunity for us, and it does not play particularly well into our basic skill set. As it also turns out though, incidentally, we did happen to have a short position in a precious metals company in Ecuador that had some unfortunate developments that actually helped out our results in April based upon some of the nationalization efforts that are going on in that country.

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Direct Link - Greenlight Capital 2008 Q1 Earnings Call Transcript.

Charlie Munger - Berkshire's No. 2 man helps from the background

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Munger answers questions alongside Buffett for hours each May at the Berkshire shareholders meeting in Omaha, Neb., and again on his own at the annual meeting in California of Wesco Financial Corp., a Berkshire subsidiary that he leads.

Buffett sometimes relies on Munger to repeat questions because his hearing is better. After one shareholder asked a lengthy question this year about how Buffett got started investing and what mindset an investor should have, Buffett turned to Munger for help.

So Munger summed it up: "He wants you to instruct him how to become less like a lemming."

When Munger does weigh in, he often cuts through Buffett's longer answer to its heart. And sometimes he critiques Buffett's response.

"Well, that was real useful advice," Munger said this year after Buffett answered a question about choosing good managers by saying Berkshire buys businesses with strong management teams in place. Then he compared that to saying the best way to get through lean times is to keep a couple million dollars lying around.

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Direct Link - Berkshire's No. 2 man helps from the background.

Leveraged Loans: Ready for Lift-Off Says Steve Tananbaum of GoldenTree Asset

Barron's recently caught up with Tananbaum, 42, at his midtown office, which houses a portion of his art collection, including the spacesuits by artist Tom Sachs shown in the photo at right.

Barron's: What is happening in the credit markets, where conditions since August have been very tough?

Tananbaum: The credit problems that started last year, and which were perceived to be isolated, really spread throughout the system. In different pockets of credit, things were mispriced. Right now you're seeing a repricing of credit. Whereas last year you were being underpaid to own credit, now you are being overpaid.

You mean, in terms of much wider spreads?

That's right. Against that backdrop, the investment banks have been damaged. Normally they provide credit to the financial system. But things aren't working the way they normally do. You're seeing the banks' inability to provide credit to a lot of their corporate customers.

Direct Link - Leveraged Loans: Ready for Lift-Off Says Steve Tananbaum of GoldenTree Asset.

Jean-Marie Eveillard - First Eagle Funds Conference Call, May 6, 2008

Now, let me move to an update to the current investment scene as we see it. I think investing is a matter of trying to balance what I would call circumstances and prices. In terms of circumstances, we have been, for a while, in a financial crisis, probably the worst since the end of World War II, which is a polite way of saying that it’s the worst since the Great Depression. This financial crisis is, to a large extent, I believe, a result, a consequence of the previous 25-year credit boom that was briefly interrupted in 1990. That credit boom, because it went on so long, in the last few years of the boom, the acrobatics by financial types, not us mind you, were extraordinary. Then the credit cycle turned in August of last year, with the sub prime housing crisis, and it has been painful ever since.

Now, I’m sure, of course, that the crisis will find its resolution; all crises do eventually. The key question, I believe, is, “How long and how painful the transition will be towards the resolution of the crisis.”

We are just beginning to see the economic consequences of the crisis. In other words, the economic slow down. We also have to worry, I believe, about the unintended consequences of the very unusual steps taken by the Federal Reserve to prevent the crisis from degenerating. Among those unintended consequences, of course, is the status of the dollar as the world’s reserve currency and the possibility that domestic inflation will accelerate.

Direct Link - First Eagle Funds Conference Call, May 6, 2008.

Interview with Bill Ackman and David Einhorn

Activist investors face challenges convincing regulators to face the facts, with William Ackman, Pershing Square Capital Management and David Einhorn, Greenlight Capital Management.

Related Links :

• Whistle-Blowing - Interview with Bill Ackman and David Einhorn Part 1
• Whistle-Blowing - Interview with Bill Ackman and David Einhorn Part 2
• Hedge Fund Poker Match
• Secret strategies of the game, with Neil Chriss, Hutchin Hill Capital; David Einhorn, Greenlight Capital Management and CNBC's Becky Quick
• Wall Street at Its Worst
• Insight on a six-year investigation of fraud, scandal and deceit on Wall St., with David Einhorn, Greenlight Capital president and CNBC's Steve Liesman
• Hedging Your Bets
• Discussing fraud on Wall St., with David Einhorn, Greenlight Capital Management president
• The Short & Short of It
• Short selling can be good for the markets, with Owen Lamont, DKR Fusion, David Einhorn, Greenlight Capital and CNBC's Steve Liesman

VIC West 2008 Links

• VIC West 2008-An Advanced Seminar on Value Investing(Part 1)
• VIC West 2008-An Advanced Seminar on Value Investing(Part 2)
• VIC West Day 1: Part 1 Sellers and Fasciani; Jeff Bronchick
• VIC West Day 1: Part 2 Vitaly Katsenelson; Atticus Lowe and Lance Helfert
• VIC West Day 1: Part 3 Zeke Ashton; Randall Abramson
• VIC West Day 1: Part 4- Ken Shubin Stein; Robert Hagstrom; Carlo Cannell
• VIC West Day 2: Part 1- Whitney Tilson and Glenn Tongue ; Aaron Edelheit
• VIC West Day 2: Part 2- Mohnish Pabrai; Steven Romick

CNN Interview with Bob Rodriguez

Robert Rodriguez has accomplished the unheard-of-feat: driving staggering returns in both a stock and a bond fund for more than two decades.

Our vote goes to Robert L. Rodriguez of the FPA Capital and FPA New Income funds. Ever since mid-1984, Rodriguez, now 59, has led these two funds to the front of the pack, the investing equivalent of running two marathons at the same time. Overseeing both a stock and a bond fund is so hard that well over 99% of all fund managers lack the guts to even try it - and nobody has ever done both better than Rodriguez.

At FPA Capital (FPPTX), a fund specializing in smaller U.S. stocks, Rodriguez has outperformed Standard & Poor's 500- stock index by an annualized average of 3.9 percentage points; he has beaten the Russell 2000 small-stock index by six points annually. And at FPA New Income (FPNIX), Rodriguez has never lost money in a calendar year; he has outlegged the Lehman Brothers aggregate bond index by 0.2 percentage points annually since 1984. In bond investing, a game of inches, that's a country mile.

• Video - Legendary investor shuns stocks.
• First Pacific Advisors CEO Bob Rodriguez explains why he's had a buy-halt on equities and high yields since December.
• The best fund manager of our time.

Buffett's Q＆A at Wharton

In a presentation he made to students at the Wharton School earlier this month and a subsequent interview with Fortune, Warren Buffett shared his thoughts on everything from the economy to the credit crisis and the Bear Stearns bailout.

In this Web exclusive, we present further excerpts from his talk with the students, in which the megabillionaire offers his insights on judging managers, buying businesses, what metrics - if any - he relies upon, and why he views his job as similar to painting the Sistine Chapel.

Direct Link - Buffett goes to Wharton.