Hope is not your only strategy

It's easier to convince people that they were wrong.
- Mark Twain



Markets have finished a turbulent past year 2012 with the goal. If Congress and President Obama met with an agreement that the federal budget occurs (and the economy) the prosecutor figurative cliff collapse During the month of December, more people have asked me if we go over the cliff than anything else could. OK, but "What can I do for Christmas?" But that was not the case of a small group of people the same question many, many (many) times.

(Also repeatedly heard: "Why the hell do you want Nigeria," The answer to this question lies in our recent summary of our research trip to see this amazing giant "Nigeria", "growing giants." African sleeping sickness).

What we saw in December was a strange confluence of market factors. First, as usual, many investors tax loss, they may lose the effects of the reduction in exposure to their benefit tax. With the impending increase in capital gains rates, but the testimony in December 2012 also saw a significant increase in sales tax, so I went ahead and investors who sold shares worth rose, locking in the tax rate in 2012. Moreover, to keep fear and hope and commitment cliff fiscal policy of the Federal Reserve had zero interest in the near future, in our opinion, the unfortunate distorted the values ​​of the market return.

These disorders have real consequences for investors. For example, I recently had a screen on the stock market performance of companies in the Russell 2000 measure often cited by U.S. companies based on small caps. The shares of companies in the bottom 25% in terms of return on equity - one of our favorites measures to ensure quality - much better than the first quartile of the highest returns on equity in the past 12 months to October 2012.

If you have questions about why we were not particularly by the movement of the shares in the short term excitement, taking into account the effects of the previous section. In fact, this data suggests that a good strategy is to deliver superior returns on investments in recent years have been made operational and loading profiles terrible. While there is certainly about dumpster diving is sometimes for a company, the low quality that we believe is trading at a price significantly below fair value, we believe that the advice of Warren Buffett, "It's much better, big business to buy at a fair price for a just society, a wonderful price is "something in the neighborhood of the Gospel. We believe that our portfolio companies tend to operational indicators, even if they are small (market orthodoxy that are perceived as more risky), headquartered in emerging markets (ditto), and result bit heavy (double ditto). When the market - as they do from time to time - focus on things other than the company expected and the quality we can. We do not believe that buying a fad or trend - built on the same macroeconomic issues - and I hope to go there, it is a good basis for a successful long-term investment.

This is not the result I expected
Not far from my home in Vienna, Virginia, is a remarkable building at the corner of two main roads, the Chain Bridge and Old Court roads. Most striking feature of the building is a large arch, concave vertical framing a building. It is possible that the building has an official name. Probably something bland "Crosspointe building trade wind" or "Eastgate Towers West." It does not matter, because everyone calls this building. "Building toilets" It even has its own Facebook page.

(Just saw: Bleh called "Tycon courthouse construction.").

This country is an attractive option, near Tysons Corner, the largest metropolitan area suburban office space in the United States. I'm sure in 1983, or the architect or builder or developer trying to make a building that looked like a giant pot to build. And yet this is exactly what we have.

Ultimately, the architectural theme tries not to call for the results they achieved relevance. I laugh a little less for the first time that the developer was in front of the proposed designs - probably at the end of the building - "Is it just me, or is that a bit like a toilet" and then j "I thought it was too late crimes against architecture that already committed to the joy of decades worth of asylum management.

If I had a difficult transition for a lesson on investment (well, you got me - I just wanted an excuse to talk about the construction of toilets) decision must always remember that our belief of what will happen is, often completely separate ex ante actually occur. I always try to, in the sense of "should" think.

Many investors make their investment decisions with false balance considering the potential benefits that can be generated, and the possibility of loss. Few people want about how they do not think. However, the absence of risks to consider, does not change the nature of these risks. It is rare that smoking is a deadly choice, but is simply mathematically correct that smoking increases the risk of all sorts of nasty diseases. Not as snuff kills 100% of the time, is that the decision should smoke, lead to unpleasant consequences for health.

Beware of the risk of events
If you think about it, a risk factor for a company rather static. The potential exposure to an investor who increased risk factor by their ignorance. In short, if you can not be identified a potential risk factor a company rather misprice their actions. This is important because, as you have seen, the stock prices fluctuate a bit, and where the population is currently in talks with the intrinsic value of an important element of risk management.

For example, very seriously in the years prior to 2007, hundreds of Chinese small caps fell on U.S. exchanges, called the most from a backdoor reverse merger. U.S. investors, feeling the very real possibility that represent the incredible growth of billions of dollars of Chinese consumers plowed in these companies. Unfortunately, many investors do not properly take into account the other side of the shipping companies with a culture or shareholders, nor any credible threat of sanctions for misconduct.

What few investors - including us - the possibility that like the Chinese government in these scams have accomplices. In April 2012, the SEC filed a court order to the accounting firm Deloitte & Touche, documents require, they need to investigate fraud Longtop Financial, a Chinese company that has - is found to misrepresent its financial results violently - in any case cost American investors more than 1 billion U.S. dollars. The Chinese government has banned Deloitte, these documents with the SEC, under the pretext that the Chinese law limits the disclosure of state secrets. Regardless of whether Longtop apparently had no secrets. If D & T ignored the request, in possible violation of U.S. law. If this is true, contrary to Chinese law.

There are two ways for investors to reduce access to event risk. The owner of a large number of companies that reduce their exposure to bad news in a company or an industry. The other - your choice - invest in relatively few companies and a deep understanding of them as possible to try to develop. We do not like strangers in our portfolios - that would be a fatality about 200-300 known companies in each portfolio. We believe that if you are familiar with the knowledge of the company, how they work and who runs it allows us to make better decisions. It is very exciting to find a new way, but if you think about it, as long as you understand something when first found less! It is vaccinated only against risks - bad things happen. But better able to anticipate and correct value anticipable in real estate companies.

In fact, although China "wins" in their attempts to Chinese companies, to protect the interests of investors and regulators, the victory will be very expensive for them. Sophisticated investors are much less likely to share. In the markets in which they buy feel the odds stacked against them, and when they do, their discounted rates will be much higher The Chinese government has in the demonstration that global investors that Chinese companies should generally considered a much higher risk of poorer quality than firms could be in other countries.

Chinese stocks fell despite market conditions that are normally very welcome them. U.S. and European economies have the smell of rot and untenability around them, and low interest rates have pushed investors looking to reduce their risk aversion across various asset classes. (May the lowest note is the debt and still considered the extent investments) - As a small example, a former portfolio was as American Tower prepares for $ 1 billion debt, indicating that Standard & Poor's has revised BBB. American Tower is the issue of debt of 3.5%, a percentage that was hardly available to the U.S. government a few years ago. As I said, the investors are in danger. Chinese equities is an obvious alternative. After all, China is one of the largest and most dynamic economies in the world. Instead, the reputation of China for the plant a little more security in Russia.
evaluation criteria Critical Thinking