Tagged: Warren Buffett

Unwired

It’s got to stop. Warren Buffett said so.

Until the Wall Street Journal’s Scott Patterson broke the story recently, most investor-relations professionals were unaware that Berkshire Hathaway unit Business Wire took fees from high-speed firms in trade for early delivery of news. It provoked outrage in circles including the office of the New York state attorney general.

I was quoted by Bloomberg’s Sam Mamudi in a related piece last Friday. What I thought was most important didn’t make the story. Sure, if something looks bad you should stop doing it, and I said so. In today’s parlance, the optics were bad.

“Quast,” you say. “They were selling our news to high-speed traders before it hit distribution channels.”

Half of every plane load today is in Group One because people get status for giving business to just one airline. It’s an early look.

“That’s flying. You don’t get in trouble for boarding early. You get locked in the poke for trading on things nobody else has got.”

That’s not true. Valuable information is the bedrock of capital-formation. Otherwise, the market would be one big index fund. And what Business Wire did wasn’t illegal.

“Are you defending it?” you say.

No. It’s bad form in an era where form, like optics, is more important than substance. But it’s like a police officer pulling somebody over for a bad taillight – which is not illegal but a safety hazard – and ignoring that the car is stolen. (more…)

Risk-Free Return

Everybody is talking about the weather. Why doesn’t somebody do something?

This witticism on human futility is often attributed to Mark Twain but traces to Twain’s friend and collaborator Charles Dudley Warner. A century later, it’s still funny.

There’s a lot of hand-wringing going on about interest rates, which from the IR chair may seem irrelevant until you consider that your equity cost of capital cannot be calculated without knowing the risk-free rate.

That and a piece in Institutional Investor Magazine some weeks back brought to my view by alert reader Pam Murphy got me thinking about how investors are behaving – which hits closer to investor-relations than anything.

When I say hands are wrung about rates, I mean will they go up? We’ve not had normalized costs of capital since…hm, good question. Go to treasurydirect.gov and check rates for I-Bonds, the federal-government savings coupon. I-Bonds pay a combination of a fixed rate plus an inflation adjustment. Guess what the fixed rate is? 0.00%. The inflation-adjusted return May-Oct 2013 is 1.18%.EE-Bonds with no inflation adjustment yield 0.20% annually. This is a 20-year maturity instrument. Prior to 1995, these bonds averaged ten-year maturities and never paid less than 4% annually, often over 7%. If the I-Bond pegs inflation at 1.18% every six months, translating to 2.36% annually, is the risk-free rate of return a -2.16%? (more…)

Understanding Markets

You’ve heard that bit of cowboy wisdom on how to double your money? Fold it over and put it back in your pocket.

I hear folks wanting cowboy wisdom on market structure. What do I need to grasp? In that sense, this could be the most important Market Structure Map I’ve ever written.

If you’re at home, get a glass of wine. We won’t belabor the story, but it’s not a simple one. In the beginning, in 1792, when 24 brokers clustered under a New York buttonwood tree and agreed to give each other preference and charge a minimum commission, trading securities was simple. That became the New York Stock Exchange. Most trades were for investing, some few for speculating. People have been gambling since the Garden of Eden, obviously.

Step forward. In the 1860s ticker tape by Morse code sped markets up but didn’t change structure. In the 1930s, the Securities Act formed the SEC and imposed a regulatory framework. Structure remained similar, if more process-driven.

Take another step. When Benjamin Graham wrote “The Intelligent Investor” in 1949 (Warren Buffett called it the best book about investing ever written), he said to first distinguish investing from speculating. Seek safety for principal and an adequate return, through research in business-like fashion to find good businesses at a discount to intrinsic value. Own them for the long term. Graham separated this “active” investment from cautious and generalized passive investment. (more…)