Investing and chewing gum at the same time

Warren Buffett is making a big bet on small comforts, and observes, in passing:

Warren Buffett, the world's richest person, said on Monday the U.S. economy is in a recession that will be more severe than most people expect.

Buffett made his comments on CNBC television after his Berkshire Hathaway Inc agreed to invest $6.5 billion in the takeover of chewing gum maker Wm Wrigley Jr Co by Mars Inc in a $23 billion transaction.

"This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.

"I think consumers are feeling gas and food prices," he added, "and not feeling they've got a lot of money for other things."

Thanks, FASB!

Marc Andreesen: "I'd just like everyone to whom I owe money to know that you're never going to get it back. And I plan on booking the dollar value of your outrage as revenue in my current quarter."

...so 2nite we're going to party like it's 1929

moral hazard: "A situation in which someone insured against risks will purposely engage in risky behavior, knowing that any costs incurred will be compensated by the insurer. A financial system which offers "rescue packages" may encourage borrowers and lenders to undertake low-quality or high-risk investments, thus increasing the likelihood of a crisis."

Related: Markets Soar After Fed Cuts Key Rate By Half A Point (New York Times, 18 September 2007)

Information Arbitrage: Keep it simple

Discipline, especially when it goes against one's native instincts, is hard. When your friend brags about a particular stock or strategy on the golf course, you are jealous, right? And when you hear stories of people making tons in _____ (choose your era - tech stocks, commodities, currencies, gold, etc.), regardless of a lack of documentation (self-reporting is notoriously poor as people tend to remember wins and forget losses), you want in, right? It is very hard to be the tortoise when you are seemingly surrounded by hares. But you know what, you can try your hand a bit if you adhere to a few simple guidelines:

1. Set an asset allocation mix that makes sense for your age, stage, family circumstance, etc. If you can't do this with confidence get some help;
2. Establish the majority of your allocation using low-cost, liquid instruments like index funds and ETFs;
3. Figure out if you want to try and dicker with investing at all, and if the answer is yes;
4. Limit your "play money" to 5-10% of your total portfolio.

By all means have some fun. Do some research. Collaborate with others. Try and generate some real alpha. But don't, DON'T have this be the core of your investment strategy. Please. Don't. Do. It.

Retail Investors + Complex Investments = Failure (Information Arbitrage, 16 Aug 07)

(Speaking of investing, the White Trash and Minor Vices Portfolio is taking a beating but, with its emphasis on consumer staples, doing one hell of a lot better than the markets as a whole. The White Trash Portfolio is only up 0.3% since inception, but that's compared to a 0.4% loss for the S&P 500 over the same time period and a 1.1% loss for the US stock market as a whole, as measured by the VTI ETF.)

Understanding liquidity risk

A few generations ago, savers responded to financial panics with runs on banks, and even healthy institutions could fail if they could not raise enough cash quickly enough.

For a long time, that all seemed to be safely relegated to the past. But now the runs are back — and this time the targets are not banks but the securities that have replaced them as the prime generators of credit in the new financial system.

“Our current system of levered finance and its related structures may be critically flawed,” said William H. Gross, the chief investment officer of Pimco, a mutual fund company. “Nothing within it allows for the hedging of liquidity risk, and that is the problem at the moment.”

A New Kind Of Bank Run Tests Old Safeguards (New York Times, August 10, 2007)

Sock-puppetry at Whole Foods

Rumors on stock discussion boards being seeded and spread by sock-puppets are nothing new.

Usually the sock-puppets only claim to have inside information and are looking to manipulate a stock's price.

Sometimes, the sock-puppets actually HAVE inside information, and their goals are... hmm.

In January 2005, someone using the name "Rahodeb" went online to a Yahoo stock-market forum and posted this opinion: No company would want to buy Wild Oats Markets Inc., a natural-foods grocer, at its price then of about $8 a share.

"Would Whole Foods buy OATS?" Rahodeb asked, using Wild Oats' stock symbol. "Almost surely not at current prices. What would they gain? OATS locations are too small." Rahodeb speculated that Wild Oats eventually would be sold after sliding into bankruptcy or when its stock fell below $5. A month later, Rahodeb wrote that Wild Oats management "clearly doesn't know what it is doing .... OATS has no value and no future."

The comments were typical of banter on Internet message boards for stocks, but the writer's identity was anything but. Rahodeb was an online pseudonym of John Mackey, co-founder and chief executive of Whole Foods Market Inc. Earlier this year, his company agreed to buy Wild Oats for $565 million, or $18.50 a share.

Whole Foods Is Hot, Wild Oats a Dud -- So Said 'Rahodeb' (Wall Street Journal [subscription required], 12 July 2007)

Overpriced at $85? (sigh)

When Google went public, I steered friends (all of whom are, thankfully, still speaking to me) away from the IPO, feeling that the stock was overpriced at its opening value of $85/share.

Now that Google has broken the $500/share barrier (with no ceiling in sight), another one of the Google Stock Price Milestone stories has hit the papers.

Of course, there are still naysayers:

As with any highflying stock, though, a few investors are actively betting on a reversal of fortune. Fred Hickey, who writes the High-Tech Strategist newsletter from his home in Nashua, N.H., says that Google’s shares are sharply overvalued and will fall as investors notice that the company’s rapid growth is slowing.

He points out that its revenue increased 11 percent from the second quarter to the third quarter — a brisk pace, to be sure, but a lot less than the 18 percent pace in the corresponding time a year earlier.

“Google showed the sharpest revenue slowdown I’ve seen,” he said, “and nobody has paid attention.” He argued further that the company’s expenses are “out of control,” and that if the economy headed into a recession, Google’s revenue would falter and its profits plummet.

“Google will suffer the same fate that Yahoo did in 2000,” he said.

Mr. Hickey has put his money where his mouth is: he sold Google shares short, a bet that the stock price will decline. But not much: the short position is just 50 shares.

“I just wanted to be able to say I was short Google when it blew up,” he said.

A $500 Milestone for Google Believers (New York Times, November 22, 2006)

Heh, yeah. He's "short Google" in almost exactly the same sense (and not far from the same dollar value) that I am "long Berkshire Hathaway."

Hey, a couple of Class B shares (and continued fractional investment via Sharebuilder) is a position...

Stop laughing.