Hottest links for Tuesday, 17th December, the late edition (see Monday’s edition of hottest links). Get our free daily newsletter (which HAS BEEN RECENTLY UPDATED) and never miss a single linkfest. Also, now if you sign up you will get our new e-book on value investing.
Top stories for today are included below. Today, we've got year-end long looks at the state of the global economy, 10 rules for stock market bubbles, and a video of a rat endlessly trying to escape a moving elevator that hits just a little too close to home as a metaphor for life.
Hottest Links: Stories
Mental Model: Margin of Safety
The margin of safety is another concept rooted in engineering and quality control. Let’s start there, then see where else our model might apply in practical life, and lastly, where it might have limitations. [Shane Parrish Farnam Street]
So You Want to Compound Capital…But Can You Avoid “Torpedoes”?
We all like to sing the praises of compound interest. Yet as many asset prices continue to climb new highs, more and more investors seem to be disregarding what it takes to actually stay on the path of compounding: looking down first, before looking up. [Oliver Mihaljevic, BeyondProxy]
Different This Time
Valuation should give us some hints about the risks we are taking, but even that isn’t formulaic and, truth be told, one of the things that doesn’t change is how our perception of risk ebbs and flows despite what the numbers say. [Tom Brakke, Research Puzzle Pieces]
What is Behavioral Finance?
n this short piece I’ll outline what “behavioral finance” means to academic researchers. The image below highlights the foundations of behavioral finance. There are 2 pieces to the puzzle: Limits to Arbitrage and Psychology. [Wesley R. Gray, Turnkey Analysts]
Global stock rally
Compared to the recessionary low of $29.1 trillion in February 2009, the total world stock market capitalization more than doubled (118% increase) to the current level of $63.4 trillion in November, more than recapturing all of the global equity value that was lost due to the severe global recession and the various financial, mortgage and housing crises in 2008 and 2009. [Mark J. Perry, AEIdeas]
Credit Suisse Group AG (ADR) (NYSE:CS) on Oil Inflation/Deflation And The Economy
A topic near and dear. From November's "CPI Headline Inflation Drops to 1% Year-over-Year":I'm not seeing that QE is doing a damn thing other than lifting equity prices.
The fact that the Fed persists in the face of that reality pretty much tells you that raising asset valuations is the goal with all the other chatter being misdirection. [Climateer Investing]
Tesla Is Lakewood Capital’s Most Costly Short Ever
One of the major losers for Lakewood Capital has been its short position in Tesla Motors Inc (NASDAQ:TSLA), which contributed a 0.5% loss to the fund in Q3. [Tabinda Hussain, ValueWalk] Related; Whitney Tilson is disclosing shorts right and left these days. Now his third short position in less than a few months happens to be in Opko Health Inc. (NYSE:OPK). [Tabinda Hussain, ValueWalk]
For Fund Managers, There is (Not) Always Room at the Top
S&P Dow Jones Indices’ study finds that only 7.23% of the 692 mutual-fund managers who enjoyed a spot in the top 25% performers as of September 2011 were still there two years later. For large-cap stock managers, the figure falls to 5.28%. [Brendan Conway, Focus On Funds]
Who's Who and What's What in Gold Miner Hedge Books, 2013
The majority of new hedge books opened since gold's nominal peak in 2011 have been imposed by lenders or motivated by tactical cash flow concerns. London-listed Shanta Gold and Australia's Evolution Mining have both used hedging this year, but only as a 'last-dollar' funding technique, used to bring new mines into production, with the majority of their output remaining unhedged. [Climateer Investing]
The Stealth Rally in Volatility
While December 2013 may seem like a pretty quiet end to a strong year for U.S. stocks, the VOLATILITY S&P 500 (INDEXCBOE:VIX) is actually on a tear thus far through the month. It closed out November at 13.70, and is up some 17% since then to close at 16.03 today. [Joshua M Brown, The Reformed Broker]
Entering the Most Dangerous Market Phase: In Three Parts
Many years ago I heard an unoriginal line in the elevator (the “lift,” for my British friends) coming down from the New York Stock Exchange Luncheon Club. “Do you know how to make a small fortune?” the old floor broker asked — then he quickly supplied the answer. “Start with a large one.” [A. Michael Lipper, CFA Institute]
Greenberg: Herbalife Audit Irrelevant to the Bigger Story
Let's not forget, the role of the auditor is to determine whether the numbers are audited in accordance with GAAP, not to weigh in on the bigger controversy, that is whether Herbalife Ltd. (NYSE:HLF) is operating an illegal pyramid scheme. [Herb Greenberg, TheStreet]
Judge Rakoff asks: Why have no Wall Street executives been prosecuted for their role in the financial crisis?
This excuse — sometimes labeled the ‘too big to jail’ — is disturbing, frankly, in what it says about the department’s apparent disregard for equality under the law. [Sital S. Patel, MarketWatch]
Kass: 10 Laws of Stock Market Bubbles
I like this list from Dougie:
- Debt is cheap.
- Debt is plentiful.
- There is the egregious use of debt. [Barry Ritholtz, The Big Picture]
GeoInvesting Responds To Bronte Capital On AmTrust
We detail below why we disagree with Bronte’s contention that our report contained errors and provide additional details so that readers can better understand what is most certainly complex accounting. We believe Bronte’s post criticizing our report on Amtrust Financial Services, Inc. (NASDAQ:AFSI) misses several key points in our report and that Mr. Hempton’s subsequent comment about ceded premiums (earned) and ceded losses (incurred) actually implies that he agrees with our approach. [GeoInvesting]
Special Situation: Celesio AG / McKesson take over – “Swimming with sharks”
Celesio AG (ETR:CLS1) (FRA:CLS1) (OTCMKTS:CAKFY) looks clearly expensive at 23 EUR. However even without operational synergies there is a lot of potential for improvement. Celesio pays ~150 mn interest on 2bn loans, a 7.5% interest charge. McKesson Corporation (NYSE:MCK) is able to refinance below 2%, this alone is more than 100 mn p.a. savings. [Value And Opportunity]
Looking at Proxy Advisory Firms from the Investor’s Perspective
The Commission recognized the role of proxy advisory firms in its 2010 concept release regarding the federal proxy system.  In that release, the Commission noted certain potential concerns relating to the activities of proxy advisors, including among other things the potential effects on shareholders of