Warren Buffett - Man of Vision

I'm sure everyone knows who Warren Buffett is. As of 2007, he was the richest man in the world. His ranking fell to number two this year largely due to the financial turmoil in wall street. It's almost universally accepted that Buffett is one of the world's foremost authorities when it comes to picking stocks and when it comes to picking undervalued investments with huge future potential. He is one man who can single handedly calm down an entire nation of investors from imminent collapse. This is just what he did earlier today by putting down $5 Billion of his Berkshire Hathaway money to buy a chunk of one of the two remaining wall street banks, Goldman Sachs. I Know.. I know.. Goldman Sachs is no longer a wall street bank technically.. But the man's brilliance can be seen from a quote he gave 5 years ago when he called credit default swaps, and derivatives in general, a "time bomb" and "financial weapons of mass destruction" and directed the insurance arm of his Berkshire Hathaway Inc to exit the business. His argument was quite simply that “there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives”. Today, Credit Default Swaps have resulted in the hundreds of billions of dollars in losses and the virtual destruction of wall street as we know it.. The man's genius can be seen from 1 simple statement more than 5 years ago..

Buffett has been known to make investments in companies that are declining but with future potential. This was in the early days of berkshire hathaway and he has since moved to a different approach. He now follows a theory of investing in high quality business with competitive advantages. He called these advantages "moat" businesses as opposed to commodity businesses. In layman's terms, Buffett's investments often involved companies whose products are priced much higher than cost and have a niche market. A perfect example was his investment in Coca-Cola in the late 80's where he knew that people would be willing to pay more money for a drink labeled Coca-Cola even though cheaper drinks with similar taste was available. He called Coca-Cola a moat business. Conversely, he believed a commodity such as salt is not a moat business because people generally didn't care what brand of salt they bought.

He often said that diversification is not necessary in investment, contrary to popular belief. He believed that you only diversify when you don't know what your investing in to protect your losses. (I guess this is true for most of us commoners) His company Berkshire Hathaway in its glory days between 1977 and 1983 never owned more than 18 companies and never fewer than 8. This shows that they didn't invest in a lot of decent companies but a few great companies.

Two of my favourite quotes:

"I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty." - Warren Buffett

"It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." - Warren Buffett on the value of Gold

An overview of the famous companies owned or partially owned by Berkshire Hathaway:
GEICO, Dairy Queen, Cort Furniture, American Express, Anheuser Busch (Budweiser), Coca Cola, Comcast, General Electric, Glaxo Smithkline, Home Depot, H&R Block, Johnson and Johnson, Kraft, Lexmark, Nike, Procter and Gamble, UPS, US Bancorp, Walmart, Washington Post, Wells Fargo.

Amazing to say the least..

Negative Campaigning - WTF mate?

I'm sick of all the smearing that's occurring on national television in the name of "political ads".. pisses the hell out of me to see 5th grade name calling coming out of presidential candidates who are supposed to represent the future progress of the world. i understand that it's politics but whatever happened to highlighting ur positives than someone else's negatives.. are we in such a depressing state that our "leaders" feel that people should vote for them not because they are the best candidate but rather they are better than the other guy.. It's happening on both sides of the border and it's disheartening to say the least.

it's sickening not just because of two opponents trying to smear one another but rather because it's eliminating the fundamental decency of politics. Government is supposed to be for the betterment of a nation but what I've seen from Obama/McCain and Harper/Dion/Layton campaigns thus far begs the question "do we need better campaign reforms??" With every smear and every lie that is spread through the media, I can't help but think that civil debate has been replaced by a political cage fight.

Yesterday John McCain released an ad identifying Obama's relationship to Franklin Raines, the former CEO of now bankrupt Fannie Mae Corp. The statement can be seen below.

"Obama has no background in economics. Who advises him? The Post says it's Franklin Raines, for "advice on mortgage and housing policy." Shocking. Under Raines, Fannie Mae committed "extensive financial fraud." Raines made millions. Fannie Mae collapsed. Taxpayers? Stuck with the bill."
--McCain video release, September 18, 2008.

Now that you've seen what the ad said.. here's the truthful aspect of it. The evidence that McCain's advisers are talking about is the Washington Post which had an interview with Raines back in July where he was asked if he "was engaged at all with the Democrats' quest for the White House. His response was that he had gotten a couple of calls from the Obama campaign and when asked about what, His response was "oh, general housing, economy issues." Furthermore, the reporter went on to ask "Not mortgage/foreclosure meltdown or Fannie-specific?" Raines's response was a definite "no."...

It's one thing to do negative campaigning.. it's totally a different ball game if ur gonna lie in it to sway the voters... To the majority of the voting public, this ad points out a negative characteristic in Barack Obama and shows him as a character who played a role in the collapse of the financial sector... It's sickening that such an ad was even approved by McCain and his advisers. Give me 15 minutes and I'll chalk up an ad with George Herbert Walker III (for those of u that don't know it's dubya's cousin not daddy) who happens to be a managing director of Lehman Brothers which incidentally collapsed last week. Oops.. I guess this can only mean that Senator McCain who voted with George Dubya 90% of the time had anything to do with the biggest collapse in the history of investment banking..

It is unfair to say that this game is one-sided as i'm sure there are comments that Senator Obama's crew passed with negative imagery.. but it's that much worse when the negativity is based off lies..

Sub-Prime Mortgage... what does it mean for joe schmoe...

I just read an article about the state of affairs in one of the world's oldest financial firms, and their plight as they seek a saviour to rescue the company from the deep trenches of the sub-prime mortgage crisis. As I write this blog, Lehman Brothers, the 161 year old financial giant is on the verge of a collapse and had lost more than $7 Billion in the last two quarters alone. Add to this fact, most of lehman's employees have gotten most of their pay with stock, stock options and restricted stock units that vest over multiple years. Think for a second about the value of Lehman Brothers stock. The stock price plummeted from an all time high of $86.18 in early 2007 to $4.22 end of trading yesterday. When Nortel collapsed a few years back, thousands of employees were laid off but at least they were sufficiently compensated for their years of service with a payment that actually cashed out to something. Lehman employees were paid anywhere between 10% and 60% of their salary in stocks and stock options. In less than a year people saw their children's college fund disappear with no warning. Their crime: being part of a company whose management took decisions that landed them right in the middle of the sub-prime mortgage crisis.

Lehman Bros aren't alone on this one either. Global banks have lost close to $300 Billion to the sub-prime mortgage crisis with the IMF predicting that by the time all this is over, more than $1 trillion could be lost into fat air. Unlike Bear Stearns, Fannie Mae and Freddie Mac, taxpayer money isn't coming to the rescue of Lehman Bros where employees face more than $10 billion dollars in losses. With 24,000 employees working at Lehman, that averages out to $42000 per employee. Imagine waking up one day and realizing that you've lost $42000 dollars because someone else decided to borrow money from your employer and they couldn't pay it back. More than 80,000 jobs have been lost in the NYC area in the last year alone, mostly in the financial sector and mostly attributed to sub-prime..

For those that are still curious about what the sub-prime mortgage crisis really is, it's quite simple. It's case of a greedy lender and a greedy borrower fighting it out.

Part 1: Greedy Borrower... A few years back, the housing market was facing a boom and house prices were going up throughout the United States. People saw this as an opportunity to grow their personal wealth and went to their banks and asked for a mortgage to finance their new home purchase. Often times, they did not make enough money to support the mortgage they were asking but were hoping that house values would continue to rise and they could refinance their mortgage at a later date.

Part 2: Greedy Lender... Typically a bank would only give money to lenders who they strongly believed were capable of paying them back. However, the banks didn't make this any easier by providing incentives such as sub-prime and adjustable rate mortgages with very appealing initial terms. The banks knew the risk they were taking but were confident that the housing market would continue to grow and people would be able to afford whatever mortgage they were getting with interest rates that were below prime.

Chaos Theory: ...All hell broke loose in 2007 when the housing bubble burst and house prices started falling to the amazement of both banks and buyers. Banks refused to refinance once the housing prices started falling and people who borrowed could no longer pay back what they borrowed resulting in high default and foreclosure rates to end up where we are today..

Now, anyone with a financial background wanna explain to me the process of securitization?? i know the banks took all these foreclosed homes and resold them to investors as securities but I don't understand how they're in a position of being screwed over if they did that. Isn't the purpose of securitization to protect themselves and pass all the losses to the investors and not the bank itself?? and if they did that, y are they on the verge of collapse?? Also, what's the point of the gov't pouring millions/billions of tax payer money into these companies if they're going down under. I guess i'm asking this from an ignorant perspective because I don't fully understand the roles all these institutions play... anyone who wants to explain this to me.. please.. feel free to comment..

The life of a nomadic co-op student

Another school term completed, another work term started, another move to a new town, another 4 months of routine life. I guess after 4+ years of it, you would think that I wouldn't complain about this anymore but the sad reality seems that each move makes me more and more bitter. Living off two suitcases is painstakingly difficult especially when you don't have a "home-base" to store your belongings. These past two weeks have been horrible in terms of settling in but I guess I have it better off than some of my buddies back in waterloo, who, by the way, were homeless for almost a week thanks to a construction delay in our new apartment. I guess a part of me is glad i didn't stay in waterloo for this term. On the plus side, we only have 2 more moves before we can settle in one place and boy am I looking forward to that. Finally a house I can settle in for more than a summer, a car I can call my own, a lifestyle that is not constrained to an extent where lunch out with friends is too expensive. I guess i'm getting a bit ahead of myself here. Let me first find a job first.

This brings me to my next point. With graduation a mere 8 months away, and a slumping economy as a graduation present, I'm finally starting to get worried about getting a good job. I know that i'm better qualified than most new grads with almost 2 years of work experience under my belt with some good, if not great, companies. I've prided myself on having varied experience by trying out different industries, different jobs, and different environments and cities. Of my 6 work terms, I've only lived in the same city twice, and that city happens to be Ottawa. Even in Ottawa, I've worked for two different companies in my two work terms. I guess the question is, how important is specialization and how important is variety when you're a university student. I could have easily spent 5 work terms at RIM and been an expert on the BlackBerry. But I chose to explore with Telecom (Alcatel-Lucent), Semiconductor (Cypress), and Consumer Electronics (RIM). In hindsight, I'm confused as to whether this was a wise decision. Now, upon graduation, do companies look at my experience and think "There's a guy who doesn't know what he wants?"or do they think "there's someone who's tried a lot and come to a conclusion on what he really wants to pursue".. I guess with a few months to graduation, I've all but eliminated semiconductors as a full time industry mainly because of the culture and "cheap" manner in which they run their businesses. Unless you're a giant such as Intel, it's hard for semiconductor firms to stay afloat and that means corporate culture is rather meagre. I did, however, enjoy my marketing term at Cypress thoroughly and had a natural aptitude for all things marketing.

Instead of rambling on, I'd like to hear your opinions on what you think is a good industry to be in and why? (P.S. If anyone has some good full-time opportunities that they know of and are willing to give me a hand, please give me a shout on that front as well.. This is my marketing/people skills talking.. if there's one thing i've learnt from that job its "contacts, contacts, contacts")