The Prime Ministers "One Dollar" bets

one_dollarThe following is a copy of email correspondence we recently had with a friend and in the same spirit as our post "Correspondence with a friend on Investing".

Help was offered after learning of tremendous losses he had suffered in a bad investment.  We decided to publish the correspondence because it reflects the usual questions and fears often heard from investors as well as the answers provided - and because we think it's more efficient to provide representative correspondence once than continue to provide the same answers on an ongoing basis.

Persons names, the origin of the prime minister, and various and sundry details referenced have been either changed or omitted in order to protect their privacy - despite this, we still could not publish all of the related correspondence without revealing identities.

The following is an update on the performance of American Greetings Corp. since our friend received the Amvona article referenced below on January 5th, 2012:

Issue Date Price Date Value Perf. Months Annualized
AM 01/04/2012   $13.01 2/1/2012   $14.93 14.8% 0.90 192.4%
S & P 500 01/04/2012   1253.28 2/1/2012   1329.28 4.1% 0.90 53.0%

On Fri, Jan 6, 2012, at 2:31 PM, Emmanuel Gregory Lemelson wrote: 

Not convinced CA and Securities lawyers are “all over” the RMBS trusts just yet… (there is tremendous denial b/c of the scope of the problem).

On another note, the shares in the article below are now up ~31% (owned for investor accounts about 6 weeks) 

You may want to look at AM (article sent yesterday – revised this morning – hopefully you received it). 

Have 100% hit rate on all ideas (w/ exception of SKX, which will prove correct in time) – the returns you could say have been at least “better than average”  ;o) with very little risk. 

There is a myth in the investment world that one must take greater risk to produce greater returns – this may be promulgated by mediocre managers who wish to pawn off their unremarkable performance on their client’s natural desire for a higher return. 

Wouldn't make these suggestions (to the ‘scariest lawyer in the world’ ;o) who just took a few money managers to the cleaners…in a record, settlement) if wasn't confident and growing more confident… 

Have produced very high rate of return for friends and family in last 1.5-2 yrs. of focusing on common stocks…  think could be of service to you as well, if you are interested (would not expect anything for this – and have not received so much as a penny from anyone else either).   

Partial documented history here (and countless other places online): 

haven’t always been able to publish all ideas (but always execute for friends and family) – for e.g. haven’t had time to write an article on it yet, but have also been buying GLW (mostly below 13). 

Hope you have been well – look forward to when we speak again someday by phone.

From: John Doe [mailto:JohnDoe] 

Sent: Saturday, January 07, 2012 12:26 PM

To: Emmanuel Gregory Lemelson

Subject: Re: on another note 

Will have my son take a look at your email--as I have too many other interests and too little time to become an expert investor.  My concerns are that macroeconomics will trump microeconomics in the next year, that is, likelihood of European problems worsening and negatively impacting US and others is much higher than the probability that all will go well.

On our recent around the world trip, the prime minister of [country name omitted], a Ph.D. in economics with close contacts to his counterparts in Europe, said he has $1 bets with several US CEOs that Dow will be 5000 by Jan 1, 2013.  While that is extreme prediction, I think Europe will have serious problems this year that will adversely impact US and leave US markets lower than they are now. 

In any event, I have lots of cash, big bet that Europe unravels (up 10% since Sept), many long term VC and other investments, and [bank name omitted] judgment accruing interest at 8%.  For now, I am following my first rule of investing: don't lose what you already have, since I don't have the time or disposition to earn it all over again.  Making another 50% will not change my lifestyle, but dropping 50% would not make me happy.

On Sat, Jan 7, 2012 at 6:56 PM, Emmanuel Gregory Lemelson wrote:

Dear John,

Thank you for the email.

Happy to speak with your son if he is interested – but believe you would be amazed at how much can be learned in a short period of time and just how simple it is... Investing, Technology, Theology are no different.

It is not so much about being an "expert investor" so much as having a clear rational framework from which to make decisions.

Consider the following:

- Are all investment philosophies equal?

- Are all investment managers equal?

- Are all opinions equal?

Truly great investment managers are no different than truly great Lawyers; there is the top .0001% and everybody else. Curiously the other .999% of money managers just like lawyers, hide in tall shiny buildings, behind "fees".

Successful investing, like success in big cases, is not complex; it is simple (albeit a lot of work).

On Macroeconomics and Microeconomics

The single biggest source of err for investors is confusing the value of studying macro-economic dynamics (a future they cannot know or predict with any form of accuracy), with studying individual securities (a future they can roughly know and predict). In legal terms, this is like confusing the beauty and high-minded ideals of moral ethics and the truth of the law with what is actually necessary to win in court or the strategy and preparedness (they are related, one depends on the other, but only the study of the later has practical utility). I have a funny feeling you never went into court quoting Thomas Jefferson or the Mosaic Law.

A false dichotomy

Here is the argument laid out in the email:

1. Premise I: European problems will worsen

2. Premise II: These problems will create a negative impact on the US

3. Conclusion: All will not go well

The argument restated:

1. Premise I: If there are problems in the world it is not safe to invest

2. Premise II: There are problems in the world

3. Conclusion: It is not safe to invest

However, if analyzed more thoughtfully the following questions might be important:

1. Are the current problems an anomaly? (consider the Cuban missile crisis, cold war, etc.)

2. When in history did "All go well"? (starting with earliest recorded history)

3. If I wait for "all to go well" will I ever invest?

The underlying driver of the argument is "fear"

Fear is not typically associated with success – why would investing be any different? Success in investing is no different than building a successful [type omitted] law practice. You settle on a strategy, you asses what you have to work with, and when you're sure of what you're doing, you go.

Consider the following argument:

1. Premise I: Fear is an emotion

2. Premise II: All emotions are irrational

3. Conclusion: Fear is irrational

Then consider if the following two statements are the same?

1. I do not invest because I have fear about the future of world events

2. I do not invest because I am irrational about the future of world events

On the PM of [country name omitted]

Have a funny feeling he will not go down in history as a great investment thinker. While it is not necessary for you to be an "expert investor" some simple categories will help tremendously.

If the PM of [country name omitted] argument is no more sophisticated than what is indicated in the email and utilizes nothing more than vague statements, radical predictions, petty bets, and above all fear, unsubstantiated by a single rational statement, is his opinion on this topic worth contemplating?

If you watch or read mainstream financial news, it is shocking how often terms such as "experts predict" or "analysts say" or simply "they" is used all the time – as in "they say". Who are the experts, analysts, and the ubiquitous "they"? What are the merits of their opinion exactly? Try reading mainstream financial news critically sometime – you'll get a laugh out of just how true this statement is when you look for the all-powerful "they".

Next time the PM of [country name omitted] (or anyone else) suggests special knowledge from "counterparts" [read: 'they'] ask a few critical questions – here are some suggestions:

- Which counterparts? Are we talking about Angela Merkel or the PM of Albania? Surely their opinions don't carry equal weight, do they?

- Did suddenly all of his "counterparts" reach "consensus", although they have never been able to in the past on a single issue, let alone one with such gravity as the possibility of a collapse in the US equities markets.

- What are their backgrounds, on what merits do their opinions rest? What is their track record of accurately forecasting the future of the Dow? Or do they have any practical experience with markets at all?

- If "they" [pun intended] are good at this impossible activity, why in the world are they in politics? They should be investors; they will become not billionaires, but trillionaires.

In the 1930's "they" used to say that the Dow would go to zero – that is ZERO, "0", "ZILCH" – it was widely held, and widely believed – imagine that – shares in the top US companies of the time (which included the likes of IBM and GM) having no more value than toilet paper – regardless of their true assets.

In 1999 there was seminal work published by a very smart man named David Elias – the title was simply "Dow 40,000" – many faithful "believed".

Speculation is speculation. It will never be investment. There are extremes in both directions and many shades of "gray" in-between – Dow 5,000 is just another shade.

Here are some definitions of "speculation:

"guess: a message expressing an opinion based on incomplete evidence."

And again:

"Reasoning based on inconclusive evidence; conjecture or supposition"

In these definitions, it is nothing more than a guess, because the "evidence" required to elevate the statement to something more can never be complete because of the very nature of the activity.

Having said that, crystal ball gazing is really more for fun and should be left out of the realm of serious investing decisions.

If successful investing came down to having a Ph.D. in economics and "close contacts with high ranking officials in Europe" ('they') – many economists would also be billionaires.

Understanding the engine that grows existing wealth (compounding), and just how powerful it is and can be when done right, is very liberating (if for no other reason than intellectual ones).

The industry is comprised mainly of "smoke and mirrors" by design. A good many brokers eat because the investing public is often confused and in their confusion unable to act on good or even great investment ideas, though they are in plain sight and require little more than basic arithmetic and a bit of work. Incidentally, the financial media and the "economists" seem to conspire to help this parasitic industry along – and otherwise brilliant businessmen surrender their wealth through something no more sophisticate than a "shell game" – "surrender" is used, because there are no loses, there are only "transfers".

parable_of_the_talentsOnce this truth is apprehended, the machinations of the world which always take place in time (what we call history) cease to matter, for they can never be changed. The foundations of sound investing are discovered to be immovable from Aesop's fables and the Gospel of Jesus Christ to Benjamin Graham and Warren Buffet (all discuss the same concepts of sound investment policy) – no event in world history has or can change these principles because they are transcendent.

It is important to focus on what can be "known" both a-priori and a posteriori (ability to act) and not be distracted by what "cannot be known" (paralysis)

The PM's statements involve three fallacies:

a) He has no way of knowing the future of the Dow or what decisions governments will make (just 'speculating' he and Merkel don't 'hang-out').

b) He has no way of knowing the impact of any hypothetical future geo-political or macro-economic events on the Dow, much less particular securities (for e.g. can he explain how this forecast will affect sales of Skechers shoes in Japan or Cisco routers in China as a result? Will the value of American Greetings real estate suddenly be different if Greece leaves the Eurozone?)

c) He has offered no hedge or alternative against his prediction - affirming the driver is nothing more than simple fear vs. rational thought (sitting on a mountain of paper in an inflationary world is not a valid alternative).

For example, if the Dow returned to 5000 as is the case in his example, what would the number represents in relation to:

a) Real inflation    (

b) Money supply  (

c) US debt          (

In other words, what is the "real inflation-money supply-us debt-adjusted figure"? it is certainly not 5000 in today's dollars.

Is there an example in modern economic history where money supply increased as a derivative of government debt, and the result was deflation? After all Dow 5000 is a deflationary event.

Is there a single example taken from history of a government which carried significant debt, had the ability to devalue its own currency and did not?

If items A, B, and C above are correctly understood, then Dow 5000 effectively means that 30 blue-chip companies in 2013 would be sold for basically Free (and many orders below not only tangible assets but indeed likely just cash on hand) – let's call it the 1930's dream come true –only 80+ years late. How likely is that?

What would be the catalyst of this radical depreciation in the value of the Dow components in light of the increases in money supply? The Dow consists of only 30 companies which are all multi-nationals – arguably the best run large companies in the world.

Will their assets be worth less than cash on hand at that point? If so, then it means the US dollar itself would have no value whatsoever (given the democratization of information in our age) – so sitting on cash would be irrelevant.

Ownership in a company in such a scenario would be safe because new monetary instruments could be recreated – but ownership rights would presumably remain irrespective of a fiscal crisis affecting the central bank. The only thing that would eliminate ownership rights would be a complete removal of the "rule of law", a scenario even more remote than a collapse of the currency.

How long is it supposed that this Dow 5000 prediction would last? Is it one week, one month, one year? If correct and prolonged (US dollar worthless), we only need to leave enough money aside for food rations and weapons, because it essentially means WWIII has broken out, in which case we all will have different priorities. If WWIII does not break out, it seems like betting on simple inflation is a safer bet.

How can the engine of growth that these companies represent in terms of return on assets, and return on liabilities defy the immutable nature of math? Money is understood in particular units of measure – the security is the engine that magnifies those units – the question is how do we find good engines, before the unit of measure changes (shrinks) against our best interest? If not common stocks, what is the alternative?

Rational frameworks should never involve fear or bold predictions about the future (which cannot be known). As above, many, if not most in the 1930s believed that the depression was a new permanent condition and that although companies at the time could be purchased for less than just their cash on hand, refused to participate in the stock market. However, the hand of time and progress does move forward, and relentlessly. The situation in Europe is probably not the end of the world – if it is, we should be talking Theology, if it is not, investing is the right topic.

Given the reality of the increase in money supply, if a prediction must be made, it ought to be that because of the ~100% increase in supply of the worlds reserve currency, the only reliable prediction regarding the future, is that there will be inflation, and significant inflation – stocks, when they are understood as companies (rather than sheets of paper) are one of the best hedges against inflation – which is the greatest, most subtle, and consistent way the government takes back the peoples wealth – including a great many wealthy. Though the wealthy often feel that they have preferential tax treatment (taxed on capital gains instead of wages), if they do not manage their money well they are taxed at a higher rate than they notice, for inflation is constant and always higher than official figures – inflation, in the end, is a tax itself.

It is also worth considering that many very smart, and important people have often made terrible investors.

As pointed out before:

"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases."   (Warren Buffet)

Thanks to widespread fear there is very little "motion" in the stock market right now.

A few more thoughts:

What is necessary for successful investing? (In order of importance):

- Genetic Predisposition – in a way "personality" – a penchant for finding "value" seems to be "hard-wired" into only the minority. That is to say, some people believe it is far better to try to buy dollar bills for 50 cents, than to pay full price. While others believe they have some special knowledge on how and when that dollar bill will become worth $1.50, so they are willing to pay up to a $1.49 for the same. Of course the first does a far better job at protecting principle, and generating consistently high returns. Part of this is because of the perfection of math, once money is lost, it takes a much higher percentage return to regain what has been lost – it is the opposite of "compounding" – which effects are equally intense on capital.

Probably less than 5% of market participants fall into the "value" oriented category. As far as can tell either a person has this "gene" or they do not – it cannot be learned.

The essay "The Superinvestors of Graham-and-Doddsville" is excellent on the topic (and have not been able to disprove the theory that a 'value' orientation cannot be learned)

- Character - Patience, disciple, courage and diligence (to name a few) are traits of character that would benefit anyone in any field. They are the sum total of the decisions we have made in our life and our experience that make us the person we are. When character is added to "what is necessary" the percentage of qualified candidates falls substantially from 5%.

However, business schools neither teach nor promote these traits of character. In fact, graduates in finance will go immediately into the investing world to analyze "businesses" without having ever built or even run one, and probably couldn't – a serious deficiency in the "experience" category.

Hence the adage:

"Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway."

While these graduates come out of universities fluent in esoteric terms intended to create a sort of "priesthood" in the investment community, they are no better off when it comes to simple common sense.

What is not necessary for successful investing?

- High Intelligence. Although it is a "nice to have". History is replete with very intelligent people losing huge sums of money. The same cannot be said of those who possess the qualities above, how many value-oriented investors, with strong traits of character, can be reported to have lost huge sums of money?

Now if an investor has the necessities above coupled with high intelligence, and perhaps exceptional analytical skills, than its pure dynamite – but it is by no means a necessity.

- Education. Because of the craziness taught in most finance departments of universities, a formal education in finances is likely to do more to confuse and disorient a money manager than assist him, no matter how many fancy words and equations they learn. The truth is little more than basic arithmetic is required to analyze a company's financial statements. Graduates of most schools of finance are really just being groomed as managers who will collect fees – actual performance (let alone bench-marked performance) will play little or no role in their compensation.

Have written more on this topic in the essay: Three Card Monte and other efficient ways of parting with your money

The goal is not to be an "expert investor", but rather to have enough sound, clear thinking to see things differently than the way the chaotic and unethical money managers want you to see it – at least that way you can choose the "right" money manager.

The first priority of investing – protecting principle

You are right to point this out, but it was what was already being said – the myth is that to get greater returns one must take greater risks – is the same way of saying what you said - i.e. protect principle – only added that the goals are not mutually exclusive (the myth). This is false.

The truth is to get greater returns, one must have a certain (genetic) predisposition and superior clarity of thought

Making another 50% may not "change your lifestyle", but it may change the outcome of your philanthropic endeavors.

The choice is not to lose or make 50% but between average and superior returns while never jeopardizing principle – losing 50% is never an option in what is being discussed above.

What a person does with their money once they have it, is their business, however there is no rational argument against making more of it, if it can be done on a consistent basis with a significant margin of safety.

....continue to invite your questions and challenges – your ideas are right (protecting principle) – what is missing is the framework. ...believe in little time your views may change (as mine did on the business of law)

Warm Regards

From: John Doe [mailto:JohnDoe]

Sent: Sunday, January 08, 2012, 4:47 PM

To: Emmanuel Gregory Lemelson

Subject: Re: Got a little carried away, but stay with me.

Greg, thanks for the input. We strongly believe that current European situation is not akin to any of the historical situations you mention and that US markets have a significant probability of getting crushed if Europe unravels, even partially.

It may not happen, but in our view the upside over the next year is not significant enough to warrant the downside risks. I simply disagree that these existential risks can be ignored on the grounds that the world always has risks. This time is different in our view---but we shall see.

My son, Daniel, has strong background in analyzing individual companies, and he has been following many--and has full Bloomberg service. He has computer science and law degrees, plus MBA in finance from the Univ of Chicago which he obtained while working as the lead analyst for a friend of mine who does distress deals and is now on Forbes 400. Daniel also had a hedge fund that was one of my most successful investments--their expertise was analyzing individual companies, particularly those in distress. We also have fee-based financial advisors, plus my other son, Demitri, has strong practical investment background.

We are not doomsayers, but we are conservative at this point in regard to US and world public markets. We have substantial private investments and have continued to make them during the last year.

Individual company fundamentals did not mean much during the US financial crisis. We will be in public markets again, but not until we have some conviction that the risks are worth it.

On Sun, Jan 8, 2012 at 7:22 PM, Emmanuel Gregory Lemelson wrote:


Thank you for the response and additional info.

Do you want my [further] opinion? (do not want to overstep bounds)

If yes, will add more.

From: John Doe [mailto:JohnDoe]

Sent: Sunday, January 08, 2012 7:24 PM

To: Emmanuel Gregory Lemelson

Subject: Re: a question that should have been asked earlier...

Always willing to learn and to hear differing viewpoints

On Mon, Jan 9, 2012 at 3:10 PM, Emmanuel Gregory Lemelson wrote:

Dear John,


Will speak to you as a friend, and totally openly.

On "differing viewpoints"

Everyone has a different viewpoint, and it is not possible to listen to all of them. The objective therefore is not merely to listen to "differing viewpoints", which is an exercise in futility, but rather to seek to identify the "highest viewpoints" – they are not all equal.  

On the "Current Situation"

Again you are correct, that the current situation is "not akin" to any of the historical situations mentioned (could not mention all of them, but consider Sept. 11th, or WWII) – history never repeats itself exactly. It is only with the clarity of hindsight that we will all understand how serious the current situation is in Europe in relation to the other extraordinary events of the last and current century – during which time the modern free markets continued to function.

To be clear the last email did not lay out an opinion on the "severity" of current events, it only made statements about the constant problems in the world, and the need for investors to keep this reality in context and finally that there is no valid argument against active and wise management of investments.

If forced to bet on what will happen with Europe (and there is NO way to know), would bet that it does NOT cause a collapse of the US equities market for the knowable reasons outlined in the last email (i.e. money supply, US debt, inflation etc.). the US's vested interest in inflation is simply too great.

On "Upside" and "Downside"

Terms such as "the upside" or "the downside" need to be examined more carefully. What is meant by "the upside" or "the downside". The updside or downside of what? The markets?

Consider the following:

- What is the difference between the market as a whole and individual companies?

- Does the performance of "the market" as a whole matter if

a) One is not buying an index fund

b) Is interested in owning (not trading) pro-rata shares in companies as a matter of investment policy.

c) Understands investment primarily as a long-term activity.

d) If companies can be found that compound returns on owners equity regardless of "market" activity.

- What is the difference between "value" and "price"?

- If the "market price" of something changes, does the "value" also change?

- Who determines the value?

- Who determines the price?

- How many market participants does it take to move the price of a company's stock?

- Is the short term price evaluation of these market participants important if their motives are not understood?

- Who has the superior ability to appraise value and determine price?

a) large groups of participants who are often known for their emotional/ irrational behavior

b) Rational Individuals with a rational framework for finding and appraising value

- How important are short term fluctuations in price (even lasting say 2 years)? The last crisis lasted about one year before prices began to reverse.

- Can the value of an asset continue to rise, even if the "market price" does not? What does this mean to a patient owner of such a security?

- Were there companies whose actual value increased during the last crisis periods (Q2 2008 – Q1 2009), even though their price declined temporarily?

- Should an investor be primarily interested in price or value?

- What does a speculator/trader focus on?

- What is the difference between speculation and investment?

At no time are Risks to be "ignored"

It is important to understand what the last email actually said. At no time was the suggestion made that risks be ignored. What was said, is that risks should be analyzed that can actually be known – rather than speculating on ones which cannot. There is a big difference between the two statements.

For example, is sitting on "lots of cash" risky?

It depends on one's view of inflation. The question is where is the analysis and calculus of this risk? After all, inflation is a risk that can be known and calculated with far more accuracy than the vague risks to the Dow index brought up in the email.

"This time is different"

Could not agree with you more – indeed the cycles of history while repetitive always take on a different form in each iteration.

For example, there are some articles on that talk about a little problem with about 7 trillion in US-originated RMBS and the related demise of clear ownership rights in real property. 

If true this would be a unique and "different" risk in a way not seen before in the US (real property laws are the foundation of our democracy). Is the risk to the securities market of this greater than the civil war? Not sure.

The author has made the opinions boldly and with confidence going back almost two years when the thought was unimaginable that people may be paying on a mortgage that will never lead to clear title to their properties.

One of the recent articles had ~4,000 shares on Facebook, was featured in the mainstream financial media, and appears to have reached about half a million readers. The suggestion at the end of that article appears to have given rise to the "occupy homes" movement which has replaced the OWS movement.

If the author is wrong, it would be reputational suicide (for it is a far more bold prediction than Dow 5000 – which was made privately). However, since those ideas were first presented some years ago, receiving much scoffing and even death threats, the reality has gradually seeped into mainstream thinking.

So how is this different than the Dow 5000 theory?

Well for one it does not rely on what "they" said. Rather, the arguments rest on more than 20,000 words formed into rational arguments, evidence presented, and the thesis packaged into articles that anybody is free to debate on the basis of rational argument and evidence. The same cannot be said of the issue raised in the email regarding the Dow 5000 theory – where are the arguments? How can they be countered or responded to? The proclamations are supremely vague.

The "no property rights" thesis is one hell of a prediction and nowhere in those ~20,000 words is it suggested that this "real" risk (not existential) be "ignored" rather very specific advice and instructions were given going back many years – i.e. if your mortgage has been securitized - stop paying it, regardless of financial ability.

Apparently more than a few million people have since "signed up" for the "no property rights" thesis:

Foreclosure free ride: 3 years, no payments

Millions Of Americans Are Realizing They Can Default On Their Mortgage And Live Scot-Free For Years

(there is also a superb article in the recent addition of Harpers weekly which covers the same topic)


It is also different from Dow 5000 theory because rather than leading to fear, it is viewed as opportunity. While nobody is running out to buy stocks, as Prince would say "like it's 1999", they haven't seemed to have noticed, that ownership rights in the equities of companies has been perfectly preserved, and with far better regulatory oversight than real estate ever had to begin with (historical property recording practices can be called "scary" at best).

Since ownership rights to 7 trillion in real estate assets are now corrupted, suddenly stocks look even better and have less competition, but apparently many a psyche has not recovered from 2000 and from 2008 to notice– no matter what the numbers actually indicate, and how good the bargains are.

Even some very fine investment thinkers were wrong on the whole "if real estate is not valid, it's good for stocks" connection...

More on the relationship between credentials and returns

It is no secret that a good many billionaires are college dropouts. Why would investing be different? Education was categorized in the last email under the "not necessary" sub-heading. 

That is not to discount the importance of education – having spent 9 years in a university, that would be hypocritical – however, it is important to recognize that while a classical education which edifies the intellect is desirable, there is little to prove a relationship between an education essentially in technical data (the ancient Greeks had 3 words to define the differences – τεχνι, γνώσης and σοφία) and an ability to generate wealth (not to be confused with a higher "paycheck").

However, some people use certain academic institutions more like social networks, whereby they leverage "who" they know rather than "what" they know – but, this does not apply well in investing over the long run, which is the most pure of all business endeavors, and requires both independent thinking and ideas.

If your response was read correctly, it sounds like extraordinary connections lead to the ability to create a fund which did well. Here are some questions:

- Did the fund do consistently well?

- If so, is it still in operation?

- If the fund did do consistently well and is not in operation why?

- If it was not able to do "consistently" well then could it have benefited from the real engine of growth "compounding"?

Above all, it should be noted that there is really only one figure which matters – that is the average annual return referenced against a benchmark.

Amvona's results are published.

It never ceases to amaze, how very intelligent businessmen will generate huge returns in their business, then settle on single-digit returns on their investments. For example, you must have produced a multi-hundred thousand percent return on your investment in your [type omitted] law practice.

The only detailed figures shared so far in your investments has been:

- A (seemingly) lost private investment in a social music site

- A lost investment in an esoteric [bank name omitted] product (although it was recovered through legal action)

- An 8% return on the settlement outstanding

Surely there are more positive returns and probably other losses. However, you would not believe how remarkably similar what you say is to almost everyone else worked with - in each case, have found a situation of:

a) High broker fees

b) Hits and misses running at about a 50/50 ratio with no consistently high returns

c) A great deal of anxiety about the whole affair

Two recent examples come to mind a) a friend with only 100k and b) another friend with ~5 mln (and estimate your situation involves ~100x the later example).

All three cases involve highly intelligent individuals, but when they begin to discuss investing it is hard to parse out anything more thoughtful than a nebulous echo of CNBC's schizophrenic headlines – in all 3 cases prior and existing brokers appear to have done a great deal to encourage this.

Email correspondence from any of these three could easily be mistaken for the other – each believing their "insight" and "special knowledge" set them apart, and yet they seem to be completely unaware that they fall into a rather large group of like-minded persons.

The other two along with many others (through conversation such as this) over a period of weeks and months changed their views, and sleep better at night – and now have consistently high returns. If this dialogue continues, believe will be the same result in your case.

On private and VC investments:

If risk is the focus, is it not legitimate to point out that VC bets often represent some of the most risky bets one can make?

Does the fact that private investments do not have a liquid public market make them safer? Do not both lack 100 years of evolution in government regulatory oversight?

Why would there be a trend towards not only private growth, but trading in private concerns (think the rise of private market places), unless public or government scrutiny was undesirable?

The average VC fund achieves an acceptable rate of return only because of the "old boys club" culture in which often valueless properties are sold to "friends" in backroom deals. While there is the rare exceptions which create huge wealth for a few VC's, on average, nobody thinks of VC funds as capable of creating say 25% annual compound growth over say 5 decades – a metric easily achieved by good value investors.

A few VC's as you know become extraordinarily wealthy through early investments in the right companies, but being able to replicate this is nearly impossible. Unfortunately many if not most VC endeavors never lead to real enduring shareholder value, and all to often resemble a sort of pyramid scheme instead – predicated on incestuous board positions. The VC world is truly a world of high risk – you could make it big here, but the odds are not in favor of sleeping well at night along the way.

For these folks, "compounding" is a dead word, because the goal is getting rich "quick", there simply is no time to allow "compounding" to kick in.

On the Forbes 400 

The Forbes 400 is nice but is this the correct canon?

The magazine tells us how each person created their wealth and got on the list, but what they do not tell us is how they also fall off the list. While names are mentioned for those who no longer "made it" yearly, they do not give an explanation for this losing performance (bad investments are the universal culprit, inflation is a close second).

Consider the following:

1. How many on the Forbes 400 have been able to stay on the list for even 10 years?

2. What does this imply about these 400 people's ability to safeguard their wealth and grow it (consistently compound returns)?

It is known that some will make great wealth – sometimes through good fortune, timing, hard work, once in a lifetime opportunity, etc. etc. – however, this should never be confused with the ability to consistently and wisely invest and grow wealth – the majority of Forbes 400 participants do not possess this ability, which is why they often fall back off the list (or down the list) in a relatively short period of time.

It has been said:

"It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires ten times as much wit to keep it." (Nathan Mayer Rothschild)

On "US and world public markets"

What does this mean to say one is "conservative... in regards to US and world public markets"?

Consider the following:

- Does this statement require bearish sentiment on inflation? Is share price not heavily influenced by monetary policy, just as cash in general is?

- Are large companies and their performance not a reflection of the economy as a whole?

- If global economics are poor, why would private companies fair any better than public ones which are often run much better and have the benefit of public and government oversight, not to mention long publicly verifiable performance track records?

- Do dislocations in price/value ratios occur more often when the number of market participants increases (public accessibility vs. private)?

The incestuous nature of "private deals" more often than not creates greater risk, not less.

The fact remains that the principles of sound investing do not change much from instrument to instrument (either it is a sound investment, with a significant margin of safety or it is not), but it seems that a great many participants in these investment classes are not actually interested in value, fundamentals or "margin of safety" when they invest in VC or private endeavors, instead they are typically focused solely on future "promise", which most often does not materialize.

Like raining Gold:

Have observed a remarkable thing about the majority of public market participants – Most invariably believe they have:

a) "An edge", some special insight, or talent, or secret information that puts them ahead of everyone else

b) Exceptional "intelligence" and "ability"

c) A special insight into where "the markets" are headed


The investment world, perhaps more than any other single industry is wrought with Hubris.

If one studies the last hundred years of stock market investor behavior, more often than any other subject the direction of "the markets" is discussed – nearly all having strong opinions one way or another – and universally they are wrong – for no-one has the ability to see into the future. Despite all the evidence that "timing the market" or knowing in what direction it is headed is virtually impossible to do, it remains the sole focus of mental energy for a great many otherwise very highly intelligent men.

This is truly a remarkable feature of public markets – how could so many bright participants be distracted with an exercise proven to be futile. For those who are not distracted, it is like the stock markets are "raining gold".

Parallels with the Legal world:

Obviously because a few will make money and a majority will lose it (by definition gains have to be asymmetrical), the above 3 points cannot be true for the majority.

Is it in the best interest of a "fee-based" advisor that your thinking is "straight" and "clear" on these points?

If you're thinking is not clear, you will have to depend on the fee-based advisor to think for you, not just to work for you – (The danger zone for the client).

Once the thinking is straight, a certain type of manager can be chosen, whose results are consistently high and is compensated for performance (the danger zone for the broker)

Again it is no different than the legal world – an attorney and a client's interests are only ever fully aligned in a fee-contingent arrangement – that is when the law is most "business-like" and that is when investing is most "business-like"

If the attorney really knows what he is doing, why would he want it any other way, he stands to make far more from mutual success with the client than from merely collecting a fee.

The arrangements must be no different with money managers. If their performance is good (high watermark – relation to benchmark), they should be paid well –and a client making 25+% on average per annum would be happy to pay such a fee. (50 mln. compounded at 25% per year is 122 mln. in only 5 years. – 372 mln. In 10 yrs)

If the performance is poor, the manager should not be paid a dime.

Much like the law, misaligned interests are the most serious structural problem in money management today.

There is never a reason to pay a fee – either the guy can do it, and repeat, or he can not.

The greatest disservice advisors can do for a client is affirm in their mind that they need "special expertise" and the landscape is complicated, filled with esoteric and difficult to understand dangers, and equally complicated and esoteric products are necessary – when the clients head is done spinning, he will realize he will never have enough time or ability on his own to possibility understanding how to do this whole "investing" business successfully – precisely how a great many clients of lawyers feel about the law and the courtroom? Their confusion so profound, that they will not even ask basic questions and in their confusion can be lead into just about any bad investment or judgment.

Religion functions no differently. There are the gatekeepers of "special knowledge" and they must be paid their due.

Albert Einstein once said:

"If you can't explain it simply, you don't understand it well enough"

Is the opinion of someone who does not collect a fee intrinsically more valid?...

A few more questions 


Why do so few focus on this? Because they do not have the ability to formulate and execute an investment philosophy which produces consistent returns – it is only through producing consistently high returns that the real engine of growth ignites – that is to say compounding.

Do you think Warren Buffet:

a) Got lucky

b) Is an anomaly?

c) His track record is not noteworthy (1964-2010 overall gain is 490,409%)

Are there are others out there with these abilities or more?

Berkshire Hathaway as the most obvious example has beaten the S & P 500 (if taken in five-year cycles) for over 50 years. It is necessary to review in 5-year cycles because of the very nature of value investing, the dislocations in value-price appraisals of the markets, and the fact that value investors are almost always doing what the public at large is not. Even if viewed in individual years, Berkshire has almost always beaten the major indexes.

That's enough for now – look forward to the new questions and challenges – of course, it would be much easier to do by phone.

Amvona News

Amvona publishes critical articles and interviews at the intersection of Faith, Finance and Economics.

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