The Rational Walk
Intelligent Investing is not a "Random Walk"

A Selection of Popular Articles for Summer Hiatus August 11, 2010

The Rational Walk will be on a mid-summer hiatus until August 23.  In the four weeks since the site redesign, average daily traffic on The Rational Walk has more than doubled which definitely exceeded expectations.  Since we have many new readers who may be unfamiliar with articles that were written prior to mid-July, we present below a list of popular articles from January to July 15.  We look forward to providing new content starting the week of August 23.

From Cigar Butts to Business Supermodels

Published February 16, 2010. There are numerous books and publications that provide detailed accounts of the history of Berkshire Hathaway as well as Warren Buffett’s life and career. It is also impossible to fully understand Berkshire without studying the life and career of Vice Chairman Charles T. Munger. A list of resources for those interested in a comprehensive history of the company and its leaders is provided as an appendix to this document. In this article, we attempt to provide some context regarding the remarkable history of Berkshire Hathaway and Warren Buffett’s investment approach. Read this article for an essay that appears in The Rational Walk’s Berkshire Hathaway Briefing Book.

Charlie Munger’s Latest Parable: Basically, It’s Over

Munger

Published February 20, 2010. Those who have followed the career of Berkshire Hathaway Vice Chairman Charlie Munger know that he has a long history of using parables to educate the public regarding business, economic, and political issues. By far, the best compilation of Mr. Munger’s thoughts on life can be found in Poor Charlie’s Almanack, which is a must read book for anyone seriously interested in Berkshire Hathaway. The latest Munger parable can be found on Slate.com and the story lacks a happy ending. Read this article for more details.

Highlights from Warren Buffett’s Letter to Shareholders

Published February 27, 2010. Warren Buffett released his annual letter to shareholders this morning along with Berkshire Hathaway’s 2009 annual report.  Our full package of analysis on Berkshire Hathaway will be available soon as part the Berkshire Hathaway 2010 Briefing Book.  For now, this article highlights several notable statements that were made in the shareholder letter regarding Berkshire’s results, management philosophy, and future plans.  Mr. Buffett also includes his usual commentary on broader economic issues.

Berkshire’s Investment in BYD: A Bet on Wang Chuan-Fu

Buffett and Wang Chuan Fu

Published March 10, 2010. Berkshire Hathaway’s investment in BYD made its first appearance in Warren Buffett’s annual letter which provides a table listing common stock investments with a market value of more than $1 billion. As of December 31, 2009, Berkshire held 225 million shares of BYD with a market value of nearly $2 billion. Berkshire’s cost basis is $232 million. While the investment has appreciated significantly, it is unusual for Warren Buffett to purchase shares of what is essentially a technology company in a very unsettled industry environment. Read this article for more details.

Examining Middleburg Financial: David Sokol’s Favorite Bank?

Middleburg Bank

Published March 26, 2010. Middleburg Financial Corporation is a small bank holding company with primary operations in the western suburbs of Washington D.C. The bank’s headquarters are in Middleburg, Virginia. Over the past two years, David Sokol has accumulated nearly twenty percent of the bank’s outstanding shares in his personal accounts. Mr. Sokol is Chairman of MidAmerican Energy Holdings and Chairman and CEO of NetJets, both of which are subsidiaries of Berkshire Hathaway. Since Mr. Sokol is often mentioned as a potential future CEO of Berkshire Hathaway and would be responsible for allocation of capital, we found it interesting to learn of his significant personal investment in Middleburg Financial and decided to take a closer look. Read this article for more details.

Highlights From Buffett Partnership Letters

Warren Buffett

Published April 19, 2010. Warren Buffett started his investment partnership in 1956 with $105,100 of capital made up of his own funds and investments from family and close friends. According to the BLS inflation calculator, initial capital was $840,920 measured in 2010 dollars which would be a very small sum to start a modern day hedge fund. What is even more remarkable was the fee structure of the Buffett Partnerships. Mr. Buffett, as the general partner, took 25 percent of all profits in excess of 6 percent. There was no “2 and 20″ structure in which the general partner received any guaranteed payment. With nearly all of his net worth invested in the fund and a young family to support, it obviously took a very self confident 25 year old to start this venture. Read this article for more details and a link to extensive notes on the letters by Frank Gifford, a Berkshire shareholder.

Graham’s Advice on “Relatively Unpopular Large Companies”

Benjamin Graham

Published May 29, 2010. Few books have been able to withstand the test of time in better form than The Intelligent Investor. Written by Benjamin Graham in 1949 as a guide to investing principles designed to be accessible to the general public, The Intelligent Investor clearly presents not only information regarding sound selection of securities but, perhaps more importantly, the correct mindset that separates true investors from speculators. For decades, Warren Buffett has recommended that readers pay particular attention to Chapters 8 and 20 covering how investors should think about market fluctuations and margin of safety. Read this article for Ben Graham’s views on “relatively unpopular large companies”.

Noble Corporation Profile and Analysis

Noble Danny Adkins

Published June 2, 2010. As we discussed in our recent article on National Oilwell Varco, the financial markets have been reacting to the Deepwater Horizon disaster by punishing the stock prices of nearly every company associated with oil and gas exploration in the Gulf of Mexico. In certain cases, the market reaction may be justified by deteriorating fundamentals and in other cases, stocks may be under pressure based on confusion, uncertainty, or merely “guilt by association”. The current situation in the Gulf of Mexico is a national disaster but is it reasonable to believe that this rich domestic source of oil and gas will not be tapped in the future? The job of the value investor is to look at these types of situations as opportunities and to identify cases where Mr. Market may have overreacted. In this article, we take a look at Noble Corporation.

The Value Investor’s Guide to Value Line Investment Survey

Published June 17, 2010. Value Line Investment Survey is one of the best ways to gain exposure to a large number of companies in an efficient manner. Value Line provides stock screening tools but the strength of the service is in the information packed one page company reports. Read this article for information on how a value investor can leverage Value Line Investment Survey.

Ten Books for Summer Reading

Summer Reading

Published July 4, 2010. With the nearly unlimited supply of books on business and finance, it seems impossible to keep up with the list of important titles that appear on a regular basis. This is particularly true for books covering the financial crisis. While we have covered many of these titles in the book review series, it is sometimes beneficial to pick up a title on topics completely unrelated to business and investing.

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The New Rational Walk Site July 18, 2010

Dear Readers,

I am excited to announce a number of major changes to The Rational Walk website.  When the site was launched in February 2009, the main intent was to create a “soapbox” for writing about investment related topics.  The site design was very simple which seemed appropriate based on the amount of published content.  However, the initial design far outlived its usefulness as the amount of content increased.

A traditional blog format tends to focus only on the latest material that is posted.  While often the latest post in chronological order is the most timely and important, this is not always the case particularly when a major original article is followed by a brief video or a post that mainly serves to redirect readers to another site.  As a result, some good content gets “lost” in a relatively short timeframe.

The new website design uses an approach more common to newspapers and magazines by presenting featured content “front and center” along with other relevant categories of content on the main page.  This will allow important original articles to be marked as “features” that will persist on the main page for a longer duration.  Videos and other brief posts will still appear on the main page in the appropriate category but will not displace feature content.

Readers will also notice more advertising in the new site.  Google has introduced the ability to prohibit certain categories of ads from appearing on the site.  In particular, this allowed me to eliminate the “get rich quick” schemes that represent much that is wrong with the investment landscape today.  The ads that appear may be investment related or targeted in some other way, but unless an ads is categorized incorrectly, the annoying penny stock promotions should not distract from the content.  I have the ability to ban individual ads as well, so if anyone notices something inappropriate, please contact me using the link at the bottom of this post.

For those who normally read articles only though the RSS Feed, I would encourage you to take a look at the new site as well.  You may see some interesting content that previously was buried within the site archives or find the site more attractive to use in general.

With the new site design, I am looking forward to posting more content on general business news, more videos of relevant interviews, and possibly some opinion pieces on current events.  Please let me know if you like the new design or if there are any problems using it.  All modern browsers should be supported.  This includes the iPad and iPhone browsers.

Best Regards,

Ravi Nagarajan
Editor, The Rational Walk

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Categories: Blogging

Comments are Now Open June 22, 2010

Comment Captcha

Dear Readers,

A few months ago, I was forced to disable the comments feature as well as the forum.  The amount of spam entering through the comment feature required excessive manual intervention and hackers were able to use the forum to attack the site.  After taking additional precautions, I am now reopening the comments feature for all articles for two weeks after initial publication.

When you are reading a specific article, a form will appear at the bottom of the page and will ask for your name, email address, and website (optional).  Your email address will not appear publicly in the comment but is required to filter out spam.  In addition, you will have to answer a “Captcha” question prior to submitting the comment.  This is annoying but necessary to prove that a human being is entering the comment rather than an automated computer program.  A sample “Captcha” image is shown below.

Initially, your comment will be held in a queue for moderation.  After one of your comments has been approved, it will be possible to submit additional comments without moderation.  It is still possible that your comment will be flagged as spam if the system believes that the email address or name you have used is fake or if the content within the comment is suspect.  If you believe that your comment has been “lost”, please contact me using the “Contact the Author” link that appears on each post.

Regards,

Ravi Nagarajan
Editor, The Rational Walk

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Categories: Blogging

Will Facebook Finally Recognize the Virtue of Simplicity? May 24, 2010

Facebook

Facebook has grown from a dorm room project intended for university students into a massive network of over 400 million users.  This is an astounding achievement when one considers that Facebook’s user base represents approximately 25 percent of all individuals on the planet with access to the internet.  Any network that grows this rapidly over such a short timeframe is bound to be controversial.

In recent months, privacy advocates have criticized the company for exposing personal information to the public and to advertisers.  Today, Facebook founder Mark Zuckerberg responded to critics in a Washington Post op-ed.

This particular quote from Mr. Zuckerberg’s article is revealing:

The biggest message we have heard recently is that people want easier control over their information. Simply put, many of you thought our controls were too complex. Our intention was to give you lots of granular controls; but that may not have been what many of you wanted. We just missed the mark.

The “Cool Feature” Curse

It seems clear that Facebook has been the victim of the “cool feature” curse that afflicts many software developers.  From the perspective of someone who is writing code for a living, additional features of the type Facebook added are perfectly logical.  They provide granular controls that empower the user to manipulate the behavior of the system in any conceivable way.  Each combination of security attributes can yield an overall profile that provides just the level of external visibility that a user might like and nothing more.

Of course, the problem is that very few “typical” users of Facebook had a solid grasp of the granular controls that were provided.  The impact of making changes to security settings was not immediately apparent despite Facebook’s attempts to show users what their profile would look like to others.  The basic problem is that too much complexity was provided to users who simply want to see security settings that, in plain language, explain what information will be visible.

“Make things as simple as possible, but not simpler.” – Albert Einstein

Facebook’s programmers did not add the granularity because they wanted to confuse users.  They obviously believed that granularity would quiet the critics by allowing complete customization of profile visibility.  However, this is of no value if the majority of users cannot understand the settings.  Therefore, Facebook must find a way to simplify their security settings in a way that satisfies the security desires of a vast majority of their user base while allowing “advanced” users to retain granular control.

The problem for Facebook could be that the demographics of their user base shifted over time.  When the network was newer, the vast majority of users were either college students or younger people, all of whom grew up with a high degree of familiarity with the internet and manipulating software.  As Facebook’s audience grew to a broader demographic, the software designers failed to see that they had to satisfy a very different group of users with different requirements.

Fortune recently published an article describing how Mark Zuckerberg resisted the temptation to sell his business for substantial sums early in its development (he was offered $10 million only four months after founding Facebook). Based on the long term vision Mr. Zuckerberg demonstrated in building the business, it seems very likely that he will safely navigate through Facebook’s current problems.

The author of this article worked in the commercial software industry for 13 years and subjected many ordinary software users to “cool features” that only a programmer could love…

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Reader Survey Results April 7, 2010

Frequency of Visits

Dear Readers:

I would like to thank those who took the time to respond to the reader survey over the past several days.  The results have been interesting and will contribute toward calibrating the content appropriately in the future.  The graphs displayed below show some selected results from the reader survey. The survey is still open for those who wish to add their comments.

Regards,

Ravi Nagarajan

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