Seth Klarman: Lessons from 2008

Widely followed value investor and (Baupost Group) hedge fund manager, Seth Klarman shares his lessons from the recent financial crisis (Hat tip to Derek Hernquist for recently highlighting this piece).

Here's an excerpt from Klarman's, "Forgotten Lessons of 2008":

"One might have expected that the near-death experience of most investors in 2008 would generate valuable lessons for the future. We all know about the “depression mentality” of our parents and grandparents who lived through the Great Depression.

Memories of tough times colored their behavior for more than a generation, leading to limited risk taking and a sustainable base for healthy growth. Yet one year after the 2008 collapse, investors have returned to shockingly speculative behavior...Below, we highlight the lessons that we believe could and should have been learned from the turmoil of 2008. Some of them are unique to the 2008 melt- down; others, which could have been drawn from general market observation over the past several decades, were certainly reinforced last year.

Shockingly, virtually all of these lessons were either never learned or else were immediately forgotten by most market participants..."

As you'll read, Klarman not only goes over the (largely forgotten or overlooked) "20 investment lessons" of 2008, he also reviews many of the "false lessons" that have been learned by investors and speculators during the 2009 recovery period.

There are some very worthwhile points to absorb from Seth's piece, so you might want to bookmark his essay for future reference. You can also find a scan of Klarman's essay here.

Related articles and posts:

1. Seth Klarman: Margin of Safety - Finance Trends

2. Thomas Woods interview: Meltdown - Finance Trends. 

3. Lessons from Charlie Munger - Finance Trends.

Bruce Berkowitz 'Wealthtrack' interview

Value investor and Fairholme Fund founder, Bruce Berkowitz sits down for an interview with Consuelo Mack on 'Wealthtrack'.

Thanks to Prieur at Investment Postcards for highlighting this interview, which offers a nice glimpse into Berkowitz' value investing style.

Check out the clip to hear Bruce's rules on investing, his thoughts on Berkshire Hathaway, and why Warren Buffett may be making a "brilliant" investment with his Burlington Northern acquisition.

When you're done with that, you can peruse our related posts for much more with Bruce and the aforementioned Berkshire Hathaway value investing greats. Enjoy!

Related articles and posts:

1. Bruce Berkowitz talks with Steve Forbes - Forbes.

2. Lessons from Warren Buffett - Finance Trends.

3. Lessons from Charlie Munger - Finance Trends.

Jared Diamond has Lunch with the FT

From the weekend edition of the Financial Times, evolutionary biologist & "guru of collapse" Jared Diamond has, "Lunch with the FT".

Here is a preview of that article:

"Jared Diamond is the guru of collapse. Collapse is the title of one of the books that have made him a world-famous academic. It is a theme that captures the Zeitgeist: markets have collapsed, banks have collapsed and confidence, even in the capitalist system itself, has collapsed.

Diamond’s celebrated book – which added to the reputation he earned through Guns, Germs andSteel, a Pulitzer prize-winner about why some societies triumph over others – sought to discover what makes civilisations, many at their apparent zenith, crumble overnight. The Maya of Central America, the stone-carving civilisation of Easter Island, and the Soviet Union – all suddenly shattered.

The question lurking in Diamond’s work is: could we be next? Could the great skyscrapers of Manhattan one day become deserted canyons of a bygone civilisation, a modern version of Ozymandias’s trunkless legs of stone?..."

Reading through the Diamond's comments on the rise and fall of civilizations and the cultural or geographic advantages that some societies have over others, I couldn't help but think back to Charlie Munger (Vice Chairman of Berkshire Hathaway), an admirer of Diamond's work.

Munger has listed Jared Diamond's books as recommended reading material, and I think Diamond's interdisciplanary thinking and style must play a large part in Munger's appreciation for these books.

As noted in his 2008 talk at Caltech, Munger is a proponent of the multi-disciplinary approach, urging listeners to become familiar with the main ideas of many disciplines so that they may integrate their findings and better understand their world. Have a look at the video and notes of Munger's talk (see above link) for more on this theme.

Back to shorting banks...

Short sales of US bank shares have increased noticeably in recent weeks ahead of the government's "stress test" results, which are scheduled for a delayed May 7 release.

Bloomberg has the details in, "Short selling of banks accelerates":

"Short sellers, the bane of Wall Street executives last year, are back.

The number of Citigroup Inc. shares borrowed and sold short increased sixfold since Feb. 27, the day the U.S. Treasury announced it would convert some of its preferred shares in the New York-based bank into common stock.

Short interest in Bank of America Corp., MetLife Inc. and American Express Co. climbed more than 40 percent in the same period, according to data compiled by Bloomberg. In total, short sales of the 18 publicly traded financial companies undergoing government stress tests were twice as high on April 15 as they were at their peak last year in July, two months before Lehman Brothers Holdings Inc. collapsed.

“People are either positioning themselves for the potential of a preferred-to-common conversion, or they have an increased perception of risk in these companies,” said Andrew Baker, an equity strategist at Jefferies & Co. in New York."

Last week Jim Bianco spoke with Bloomberg TV about the delay of stress test results, saying that investors would be correct to assume that delays mean "the news is not good". He added that the stress test results might reveal that surprisingly large "TARP-like numbers" are needed to further recapitalize "stressed" banks for an economic downturn.

Meanwhile, Warren Buffett and Charlie Munger have criticized the stress tests for 19 large US banks, saying that most are not "too big to fail" and could easily be wound down with help from the FDIC. The two added upbeat opinions on some of Berkshire Hathaway's own financial holdings, including Wells Fargo (WFC).

Bloomberg, quoting analysts at CreditInsight, reported that Wells Fargo and some of its smaller rivals may have to turn their preferred shares into common stock as a result of the stress tests.

Related articles and posts:

1. Investors seem resigned to Bank USA - Wall Street Journal.

2. More banks will need capital - Wall Street Journal.

Buffett's successor + Woodstock for capitalists

It's that time again: this weekend a boatload of Berkshire Hathaway (BRK.A, BRK.B) shareholders will descend on Omaha to attend the annual Berkshire shareholders' meeting and hear the great Oracle, Warren Buffett, speak.

Only problem is, this year WB will have some explaining to do. As the Financial Times reports, Buffett faces a grilling from investors who'll expect him to account for the company's worst year ever.

Excerpt from the FT piece:

"Buffett-watchers say this year’s meeting of shareholders in Berkshire Hathaway, his candies-to-insurance group, will depart from the usual pattern of deferential questions and folksy answers and witness some criticism of the billionaire investor.

“The hard questions will be asked this year,” said James Altucher, a hedge fund manager and author of Trade Like Warren Buffett. “There will be people who always stand by him and others who will ask: ‘Have you lost your way?’”."

Another small cloud looming over Berkshire Hathaway is the now-frequently discussed issue of CEO succession. Who will fill Warren Buffett's shoes as Chief Executive Officer and Chief Investment Officer at Berkshire?

In fact, as Berkshire followers already know, it will likely take two individuals to carry out these seperate roles that superstar-CEO Buffett has long carried out himself.

There is a good deal of concern about finding successors who could live up to Buffett's outstanding long-term track record of success, but Berkshire insiders are confident that the unique corporate culture put in place by Buffett and Vice-Chairman Charlie Munger will continue after Buffett is gone.

We've added some recent Bloomberg TV segments here which speak to that issue. Bill Gates, Donald Keough, David Sokol, Byron Trott, and Buffett himself are interviewed for this special on Buffett's inner circle and succession at Berkshire Hathaway. You'll find more on this topic below in our related articles section.

Related articles and posts:

1. Buffett refocuses attention on Berkshire - Bloomberg.

2. Eveillard, Child, Pabrai on Berkshire, Buffett - Bloomberg.

3. Berkshire, Buffett bear brunt of bear market - Finance Trends.