Cunningham, Berkshire Beyond Buffett

Warren Buffett is now 84 years old. Although he is still tap dancing to work practically every day—at least when he’s not galavanting around the country, people can’t help wondering how the company will fare once he is no longer at the helm. Lawrence A. Cunningham addresses this question and, as the subtitle suggests, gives a fairly upbeat answer in Berkshire Beyond Buffett: The Enduring Value of Values (Columbia Business School Publishing, 2014).

Berkshire Hathaway is a sprawling conglomerate comprising nearly 600 business units. (GE has 300.) Its subsidiaries include insurance operations, most notably GEICO, GenRe, and National Indemnity, and a range of other businesses big and small—for instance, BNSF, Fruit of the Loom, H. J. Heinz (50% owned), HomeServices of America, Dairy Queen, Johns Manville, Lubrizol, Berkshire Hathaway Energy Co. (formerly MidAmerican Energy), McLane, NetJets, Shaw Industries, The Pampered Chef, and the Omaha World Herald.

Warren Buffett once famously said that “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” And, along the same lines, “I can’t be involved in 50 or 75 things. That’s a Noah’s Ark way of investing—you end up with a zoo that way. I like to put meaningful amounts of money in a few things.”

Buffett may believe in concentrating his stock portfolio holdings, but the Berkshire family of companies is not only large but is also quite diverse. Granted, it’s short on high tech and health care companies so it’s not quite a Noah’s Ark, but it still spans numerous sectors of the economy.

Buffett makes a point of not being involved in the management of these companies. As Cunningham explains, “Berkshire’s hands-off management approach was made by choice but became necessary by default…. The choice to operate in a decentralized manner from the beginning reflected a belief in the value of autonomy and a conviction that people properly entrusted with authority will generally exercise it faithfully.” (p. 105)

The Berkshire companies exhibit a diversity of management styles and structures, but they are loosely bound by the Berkshire culture. Cunningham devotes the largest part of his book to illustrating how individual companies exemplify particular traits that create the Berkshire culture. (He strains to make these traits spell BERKSHIRE, mixing nouns and adjectives and not always choosing the most apt word.) He traces out the origins of these companies, how they came to join the Berkshire family, and how their managers are generating long-term economic value by simultaneously pursuing economic profits and intangible values—values such as thrift and reputation. There have been hiccups along the way, but by and large Berkshire companies are ones Buffett can truly be proud of.

What challenges face a post-Buffett Berkshire? Cunningham suggests that “problems will arise from the acquisition model, hands-off management, and a sprawling decentralized structure that eludes tight control and consolidated non-financial reporting.” (p. 220) Areas where Berkshire now gets a pass because of Buffett’s reassuring presence may come under closer scrutiny.

Overall, however, Cunningham is optimistic about the future of the company. “As a new guard leads the evolution of Berkshire beyond Buffett, they will set its course and the company will never be the same. Yet the core values that define it have proven to offer unique sustaining value. It is hard to imagine Berkshire without Buffett. But it seems wiser to believe in Berkshire beyond Buffett, an institution that transcends the man and will be his legacy.” (p. 232)

Cordier and Gross, The Complete Guide to Option Selling

In this, the third edition of The Complete Guide to Option Selling: How Selling Options Can Lead to Stellar Returns in Bull and Bear Markets (McGraw-Hill, 2015), James Cordier and Michael Gross explain how to use options to make money in the commodities futures markets. Most of their recommended strategies involve naked positions; only one, the vertical credit spread, is a defined risk trade.

The authors list seven reasons for preferring commodity futures options over equity options. Heading the list are substantially lower margins and high premiums for deep out of the money strikes. “With the SPAN margin system used in the futures industry, options can be sold for margin requirements as little as 1 to 1 1/2 times premium collected. For instance, you might sell a corn option for $600 and post an out-of-pocket margin requirement of only $700.” And “unlike equities, where to collect any worthwhile premium, options must be sold 1 to 3 strike prices out of the money, futures options can often be sold at strikes deep out of the money.” (p. 63)

Traders who want to delve into this world of high leverage and theoretically undefined risk had best know something about commodities. As the authors say, “’Know your market’ is every bit as important, if not more so, as ‘Know your option.’” (p. 343) The authors thus devote one part of the book to commodities fundamentals and seasonals.

Although they suggest that selling puts or calls can be a powerful strategy, due in part to “its sheer simplicity,” (p. 333) the “best option-selling strategy ever,” in their opinion, is the ratio credit spread. In fact, they call it the Maserati of option credit spreads. In a ratio credit spread you sell a certain number of options at a particular strike and buy fewer options at the “one closer to the money strike” in the same contract month. A three to one ratio “offers the best balance between potential for profit and risk protection.” (p. 160) The authors give examples of this strategy and offer a few tips for adjusting positions to reduce risk or increase profit.

As should be clear by now, the title of this book is misleading. It’s not the complete guide to option selling in general but a pretty complete guide to selling options on commodities futures. And since, as the authors readily admit, it’s difficult at best and in many cases impossible to extrapolate from commodities to equities, potential readers of this book should be looking to expand their options trading or diversify their portfolios by including short options on commodities futures. Otherwise, they should turn elsewhere.

Book sale

Once again, I’m offering readers of this blog an opportunity to get books I’ve reviewed at cut-rate prices. Orders that total more than $100 (not including shipping charges) will receive an additional 10% discount. Domestic media mail shipping is between $3.50 and $4.00 for a single title, less per book for multiple titles. I’m willing to sell to non-U.S. buyers, but shipping charges can be prohibitive.

These books are officially used because, yes, I read them. But I have one of the tiniest “book footprints” on the planet; my used books look better than most new books at the local bookstore. No dog ears, no coffee—or, in my case, tea—stains, no visible fingerprints, no broken spines.

If you would like to buy any of these books, please email me at readingthemarkets@gmail.com and I’ll give you a total price (including shipping) as well as my PayPal ID. Yes, my preferred method of payment is PayPal. I’ll fill “orders” on a first come, first served basis and will update the list as I receive payment.

Baker & Kiymaz, Market Microstructure in Emerging and Developing
  Markets $39
Baker & Nofsinger, Socially Responsible Finance and Investing $33
Bhuyan, Reverse Mortgages and Linked Securities $19
Byers, Blind Spot (stamped “review copy not for resale” on bottom
  edge) $7
Caliskan, Market Threads (stamped “review copy not for resale” on
  bottom edge) $20
Fisher, Wall Street Women (paperback) $10
Fox, The Myth of the Rational Market $10
Fraser, Wall Street (2009 paperback) $5
Frush, The Strategic ETF Investor $6
Fung et al., Dim Sum Bonds $28
Isbitts, The Flexible Investing Playbook $8
Katsman, Retirement GPS (paperback) $3
Klein et al., Regulating Competition in Stock Markets $22
Kolb, Financial Contagion $30
Kroszner & Shiller, Reforming U.S. Financial Markets (paperback) $4
Malloch & Mamorsky, The End of Ethics and a Way Back $14
McCann, Tactical Portfolios $31
Phillipson, Adam Smith $10
Sandford, Goals to Gold (paperback) $11
Sorkin, Too Big to Fail $5
Triana, The Number That Killed Us $15
Warshawsky, Retirement Income (paperback) $8
Weiss, The Big Win $11
Wilcox & Fabozzi, Financial Advice and Investment Decisions $52

Book sale coming soon

A heads up. To keep my work space from completely closing in on me, I regularly cull my library of books on investing and trading. And so on Monday morning I’m going to put about fifty books up for sale at roughly half their Amazon price. I hope you’ll find something that you need or want on the list.

Stein, How to Really Ruin Your Financial Life and Portfolio

Ben Stein has some very charitable friends. Both Warren Buffett and Jim Rogers wrote praiseworthy comments that appear on the back cover of this paperback. (Mind you, he also wrote some nice things about them in the book.) I am not so benevolent.

I don’t normally write about books on personal finance, but I made an exception in this case because I thought it would provide comic relief from my usual fare. After all, the author gave the famous “anyone, anyone” lecture on economics in Ferris Bueller’s Day Off. Of course, even there, without the priceless shots of student reactions to this deadly teacher the scene would simply have been boring.

And so it is with How to Really Ruin Your Financial Life and Portfolio (Wiley, 2014, with new preface). Stein tries to inject some humor into his discussion of finance, but to my mind the book falls flat.

Most of the advice Stein gives the retail investor is decent. But it’s mainstream advice that’s readily available elsewhere at no cost.

If reverse psychology is a powerful motivator, then perhaps this slim book has merit. Otherwise, it’s just one more attempt to explain the merits of buy-and-hold index investing and to expose the problems inherent in picking individual stocks, investing in hedge funds, emulating endowment funds, timing the market, using margin, and not reinvesting dividends. Yawn.

Spier, The Education of a Value Investor

The PBS series on the Roosevelts paid tribute to the importance of having a role model. FDR walked in the footsteps of his fifth cousin Teddy, all the way to the White House. Guy Spier, who runs the Aquamarine Fund, found his role models in Mohnish Pabrai and Warren Buffett. (Spier and Pabrai are probably best known for their $650,100 charity lunch with Buffett.) He has yet to achieve Buffett’s extraordinary success, but he’s a lot closer today than when he started.

The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment (Palgrave Macmillan, 2014) is not so much about value investing as it is about becoming an investor of value—that is, a person of moral worth and inner strength who happens to earn his living investing on behalf of himself and others.

Spier may have gone to Oxford and the Harvard Business School, but he was a naïve soul, easily influenced. He started his career at a sleazy investment bank, D. H. Blair, and admits that it took him “far too long to grasp that this business was set up in such a way that, if [he] wanted to win, [he] would have to lose whatever was left of [his] moral compass.” (p. 18) In the wake of the D. H. Blair fiasco, he discovered the positive power of Tony Robbins’s “brainwashing” and began devouring books by other self-help gurus. And, oh yes, he also started learning about, and becoming fixated with, value investing.

He still couldn’t get a job, however. At this point his father came to the rescue and gave him about $1 million to invest for him. Within a year his father invested more, and two of his business associates joined in. The fund’s initial assets amounted to about $15 million. Spier named it the Aquamarine Fund, in homage to his father’s company, Aquamarine Chemicals.

Obsessed with improving himself and his business, Spier latched onto a book Charlie Munger mentioned in one of his speeches, Robert Cialdini's Influence: The Psychology of Persuasion. He read and reread this book multiple times and was particularly taken with a story the author told about a car salesman who sold a record 13,001 cars in 15 years, in part because he sent holiday cards to thousands of his former customers with the words “I like you” printed on each card, along with his name.

As Spier admits, “I have a tendency to go to the extreme: if an idea resonates for me, I don’t just flirt with it—I embrace it to the nth degree. So I decided that I would write three letters per working day, or 15 per week. I began to thank people for giving a great speech, for sending me their investor letter, for providing a great meal in their restaurant, for inviting me to their conference. I would send people cards to wish them a happy birthday. I’d send them research reports or books or articles that I thought would interest them. I’d send them notes saying how much I’d enjoyed meeting them.” (p. 58)

He started this letter-writing crusade as a way of marketing his fund, but he says that “it ended up giving me a richness of life that I could hardly have imagined. Rather than becoming a good salesperson, I found myself starting to care about the people I was writing to and to think about how I could help them. The paradox is that, as I became more authentic and discarded my agenda, people became more interested in investing in the fund. This was an unintended consequence of becoming less selfish and more honest about who I am.” (p. 59)

Spier used many tools to accelerate his inner growth—seven years of Jungian therapy, an assortment of other kinds of therapy, as well as religion and philosophy. But the greatest springboard for this inner journey was his participation in a “close-knit group of about eight to ten professionals” who shared their personal issues. (p. 172)

As far as his investing success is concerned, one of its springboards was his decision to turn off his Bloomberg terminal. He couldn’t bring himself to get rid of it completely, although he often goes for weeks without flipping the “on” switch. “Still, it’s there if I ever need it—my own exceptionally expensive version of a toddler’s security blanket.” (p. 107)

For Spier, professional success requires careful study and the deliberate application of the principles of value investing. But underlying this success, Spier is convinced, is inner strength, which increases as a person proceeds along his inner journey. He concludes: “The truth is that it doesn’t matter how you do this inner journey. What matters is that you do it. … For an investor, the benefits are immeasurable because this self-knowledge helps us to become stronger internally and to be better equipped to deal with adversity when it inevitably comes.” (p. 173)

Boxer, Profitable Day and Swing Trading

Harry Boxer, a veteran trader and technical analyst, has a subscription website with a live trading room that focuses on trending small- and mid-cap stocks. I don’t know how good it is (on the home page it boasts outsize returns and has the usual rave reviews), but if subscribers make money it’s testament to good old fashioned technical analysis. Because in Profitable Day and Swing Trading: Using Price/Volume Surges and Pattern Recognition to Catch Big Moves in the Stock Market (Wiley, 2014) there’s mighty little that’s new.

Yes, Boxer does tout the proprietary technical indicator from Worden Brothers, Volume Buzz, that I, who have never used their software, was unfamiliar with. Otherwise, the only things that can’t be found in most other technical analysis books are the ticker symbols—the likes of WUBA, ZHNE, FMI, VISN, MLNX, XPO, ATRM, RGDO, JKS, P, ADEP, ARWR, RMTI, VTR, RNF, DQ, SCTY, GENT, GTN, AFOP, BITA. Boxer includes color charts of these, as well as several other stocks, to illustrate his points.

Chapters deal with moving averages, trend lines, targets and stops (including Fibonacci and Elliott Wave analysis), technical divergences, stochastic oscillators, MACD, Bollinger bands, and position sizing and money management.

Boxer also offers eleven rules and guidelines to better trading, such as avoid trading during the first 15 minutes of the market open; use limit orders; have a selling plan; keep a journal of all your trades; be willing to lose before you can win; trade strong stocks long in an uptrend, short weak stocks in a downtrend; and wait for the pullback/retest.

Purchase of the book includes access to an 80-minute online video seminar.