Dan Sweet

You, a billionaire, are asked to address a 9th grade graduation…

…obviously you blow them off and continue enjoying the Mediterranean right?  Wrong.  Paul Tudor Jones, a famous Wall St trader, accepts and decides to speak on the topic of “failure.”  Don’t be put off by the 13 pages, it reads in probably 5-10 minutes thanks to the size 25 font.  Hit the “toggle fullscreen” in the upper right of the box below.

Paul Tudor Jones – Failure Speech June 2009

Originally posted by The Investment Linebacker here.  I stumbled on Paul Kedrosky’s repost here.

Warren Buffett on the best investments for young investors now? (12 of 12)

This is the final post in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

What do you see as the best investments for young investors now?

Do the internet equivalent of what I did with Moody’s books.  I found 15-20 companies in an afternoon looking through a 2004 guide to Korean companies published by Citi.

Example: Dehan Flour Company.  Earnings of 12k historically and 18k most recently.  200k book  value with 100k in marketable securities.  Selling for 38k won.  (2x earnings!)

Look for good fundamental businesses.  Selling for 2-3x earnings.  As long as you choose companies with great balance sheets you can’t lose.  In the U.S. I’d just choose 2-3 companies.  In emerging markets I’d probably diversify a little more.  A 5x return in 3 years would be doable.

Read Graham’s Chapter 8 of The Intelligent Investor on Mr. Market.  The market is the best place to make a lot of money without being very smart—and that’s what I was looking for.  If you bought a farm for $600 an acre you wouldn’t get upset if another farm sells for $550 an acre.  The farm doesn’t know what I paid for it.  Mr. Market is the best partner to have.  He’s psychotic, he’s drunk.  Sometimes its ridiculous.

The idea that the market is there to serve you and not to instruct you is the most important idea to keep in mind.

Liquidity should not suck you in.  Ask yourself, “would I be happy with this purchase if they closed the market tomorrow for two years?”

What you need is the right business, run by the right people, at the right price.

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Warren Buffett on derivatives (11 of 12)

This is the eleventh in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

How do you feel about derivatives?

Derivatives create big positions people don’t understand.

Classic case is detailed in the Brady Report from October 19, 1987.  130/30 is the new hot thing.  Portfolio insurance was the thing then.  “Dynamic Hedging”  Basically the lower it goes the more you should sell.  Institutions had to sell at certain levels and everyone knew it.  Less than 2% of the market was on this kind of auto-pilot program-yet crashed the whole market.  Derivatives have created huge amounts of capital that are forced to move automatically.

They offer opportunity to me but a lot of people can get hurt.

A greater portion of the market is poised on a hair trigger to respond to given messages.

Federal Reserve margin requirements are 50% for you and me.  So many ways around that. “total return swap” for example.  Long Term Capital Management had a $6 billion position with no capital put up.  Whatever happens in the market is exacerbated by derivatives.

Banker’s Trust screwing P&G—like 8 variables those companies didn’t understand.

We will make a lot on derivatives but I will know every position.

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Warren Buffett compares railroads to the Cubs (10 of 12)

This is the tenth in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

Which railroads do you like and why?

Rails had a bad century—just like the Cubs.  Rails used to have 1.5 million employees.  They are getting more done now with only 200k employees.  Competition ruined the business.  Excess capacity is a terrible thing.  Rising oil prices hurts truckers 3-4x more than rails.

RR business just eats up capital (not good).  Coke vs the bottlers.  I’m in the right one.  RRs use too much capital to ever be great.

There is a slight advantage for the West Coast in terms of future growth prospects.  I like them because they are bigger and easier to put more money in.

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Buffett used to run a hedge fund? (6 of 12)

This is the sixth in a series of twelve posts. The introduction to the series is here.
By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

You’ve been critical of hedge funds in the past.  Didn’t you run a fund with a similar structure before?

There was no base 2% fee.  I had all of my own money in.  I took 25% on returns over 6%.  I’d support it now days with a zero base as well.  Have proposed a $1 million bet that Nathan Myrvold can’t pick five funds of funds that can beat the S&P over 10 years.  Myrvold, former CTO of Microsoft, is still thinking about it.

No question in my mind that hedge funds and private equity will underperform the S&P.  The frictional costs are just too high.

In a speech I gave at Columbia 20 years ago I identified people who will beat the market with no risk. (reference to The Superinvestors of Graham-and-Doddsville)

Pension funds are run by people who respond to sales efforts.

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