Thursday, March 31, 2011

Marc Faber: America Is A Failed State

"A level-headed, knowledgeable, and intelligent American friend of mine (she has been buying gold for years) recently observed that, 'Only when the American people insist that sound business practices and moral standards be brought back will we be able to give the people of this country a future.'

Unfortunately, I believe that the ongoing moral decay among US politicians and the business elite, the irresponsible fiscal and monetary policies, the decline in educational standards and infrastructure, the trade and current account deficit, the weak US dollar, and the heavy-handed and ambiguous meddling in foreign affairs by US officials, are all pieces in a puzzle, which when assembled reads: Failed State."

Marc Faber

Wednesday, March 30, 2011

Jim Rogers: I Will Never Sell My Chinese Stocks

"I only like to buy China when it collapses and it hasn't collapsed in nearly two years.  My children are going to own my Chinese shares. I'm not planning to sell my Chinese shares ever."

Jim Rogers

Jim Cramer: I Don't Pump Stocks

"I don't pump stocks.  I explain why they're going higher."

Jim Cramer

Julian Robertson: Bullish On Super Growth Stocks

"I think the most attractive things are the super growth stocks, the Apples, Googles and Amazons, that are now trading around 25 times earnings."

Julian Robertson

Robertson is also bullish on commodities and on China.

Tuesday, March 29, 2011

George Soros Begins To Create A New Economic Order

Just two years ago, billionaire investor George Soros declared that he wanted to restructure the whole economic system of the world.

Two weeks from now, Soros will begin to do so, without anyone having noticed. Journalists from Wall Street Journal write that a fund that Soros started with more than $50 million dollars will hold on April 8 an international conference which aims to bring “new international rules” and to “reform the global monetary system”.

The event will gather over 200 personalities from academic scene, business and government apparatus, in an attempt to replicate the famous Bretton Woods in 1944, which led to the creation of IMF (International Monetary Fund) and World Bank.

Soros wants a new “multilateral” system in which America no longer occupies a dominant position. Most of those who will speak at the event have direct links with Soros.

Among them will be Paul Volcker, chairman of Obama’s economic council, friend of Soros, whom he called “a big speculator” of our times. Another participant is the economist Jeffrey Sachs, president of The Earth Institute, a foundation that received from Soros approximately 50 million dollars to finance the Millennium Project.

Joseph E. Stiglitz, the famous economist and Nobel prize winner for economics, also a friend of George Soros, will be attending the event with Rob Johnson, a former director of Soros Fund Management.


Monday, March 28, 2011

Jim Rogers: The Tipping Point Of The U.S. Dollar

“Somewhere along the line we’re going to have a tipping point for the dollar, then, it’s all over. I thought it would happen in a few years; maybe it’s going to happen in a few weeks.”

Jim Rogers

Sunday, March 27, 2011

Future Babble: Why Expert Predictions Fail - And Why We Believe Them Anyway

How the price of oil will go up, how the price of oil will go down, how house prices will certainly fall, how house prices will most definitely rise: turn on the radio, open a newspaper and the predictions of experts are seemingly ubiquitous.

In Future Babble: Why Expert Predictions Fail - And Why We Believe Them Anyway, Dan Gardner wonders why we have always lived in a world of predictions, what it is about them we find so attractive and why they unfailingly appear inaccurate.

There have of course been predictions that were not only wrong, but which now seem bizarre: in the 1970s the world would begin to starve to death, by the year 2000 the Soviet Union would have the fastest-growing economy in the world, there'd be permanent undersea colonies, artificial moons to illuminate large areas at night, we'd all be using driverless cars, having robot maids and holidays in space.

Of course, reading old predictions about the future that is now the past - and with the benefit of hindsight - it would be too easy to mock the experts. But, as Gardner points out, there's a universal desire to know the future. We have, he says, a "hard-wired aversion to uncertainty".

Indeed, on one of the few occasions a futurist is cited approvingly, Gardner quotes George Friedman, author of The Next 100 Years, as saying that "predictions are built into our existence". Saving for retirement is a form of prediction and even every time we cross the road: we predict that a car won't run us down because the lights are on red!

More significantly for Gardner, however, is the authority we entrust in the experts to make the important predictions around which so much of our world revolves. His discussion of our willingness to accept expert predictions is fascinating. However, readers of his earlier book RISK: The Science and Politics of Fear, will be familiar with the anthropological, physiological and psychological arguments the author employs to discuss our decision-making abilities - or lack of. The temptation in this book was to skip those bits ... and I almost succumbed.

Gardner begins his book by writing about his grandfather, born into a good middle class family in good middle class England at the beginning of the 20th century. Britain had a vast empire, the telegraph and the airplane were modern miracles, and he asks, how could the future have been anything but grand? Of course, within a few years the world was plunged into a savage war and millions lost their lives, but the end of war and an eternal sense of optimism have always marked many predictions for the future.

Others, notably H.G. Wells in The Shape of Things to Come, accurately predicted the future 'Second World War' (although he forecast a decade-long slaughter ending not in victory for one side or the other, but the exhaustion and collapse of all nations).

Contrary to a belief that most human beings are born optimists, Gardner also refers to the doomsayers on the 1980s who saw the build-up of nuclear weapons under Ronald Reagan as the impending approach of Armageddon. The left wing of politics is, however, no more guilty of mistaken expert predictions than the right wing. Neither side of the political spectrum predicted the rapid collapse of the Eastern bloc and the Soviet Union for example.

Apart from conflict, economics is the other great field for expert predictions and again Gardner points to the failure of all the economic experts and forecasters. No-one predicted the wealth and prosperity to come following World War II, it was generally thought that Japan would replace the US as the economic superpower and China would remain isolated and, more basically - but just as importantly - the world's great minds still seem to get it wrong in something apparently so simple as predicting the price of oil.

In a similar vein, Gardner seems to suggest that the current debate about energy crisis should be placed within the same framework. He quotes former US President Jimmy Carter who, back in 1977, said that soaring energy costs would imperil civilisation. But, writes Gardner, "cheap oil was the very breath and blood of the American way of life" and Carter was "spectacularly wrong" because crude oil prices collapsed in the 1980s and early 1990s.

Obviously, oil prices are determined by more than just supply and demand. So many other factors need to be taken into consideration: war and civil unrest, new inventions, new and alternative energy sources, new ways to find and drill oil, new oil fields are just a few examples.

Inventions and human ingenuity of course will always seem to confound expert predictions and, in Future Babble, Gardner cites the fascinating example of the Anaconda Copper Mining Company. The Anaconda company is all but forgotten today but was once one of the largest companies in the world because of the expanding market for copper. In 1968 the company's president boasted about how strong it would still be in 100, 500 years. Then British scientists figured out how fibre optics could theoretically be a medium of communication and two years after the president's speech, fibre optics were vastly superior to copper wires, the price of copper plummeted and Anaconda sold itself facing liquidation in 1977!

Gardner quotes the philosopher Karl Popper who perhaps best expressed scepticism about the whole industry of expert predictions. "The course of human history is strongly influenced by the growth of human knowledge," Popper wrote. But it is impossible to "predict, by rational or scientific methods, the future growth of our scientific knowledge" because doing so would require us to know that future knowledge. "We cannot, therefore, predict the future common course of human history."

The future, as Gardner so succinctly puts it, "will forever be filled with surprises". Accidents or something apparently trivial can push history into a certain direction: there is always a massive and highly significant element of chance. That's why so many expert predictions are totally meaningless.


Jerry Hoskey: Massive California Earthquake March 28-April 9

Just when you were about to give a big sigh of relief that Jim Berkland was wrong, earthquake date has been extended.

It appears based on the tweet date, he was correct about the Japan nuclear meltdown.

Jesse Livermore: Preparation And Experience Is Required For Success

"Of course the same things happen in all speculative markets. The message of the tape is the same. That will be perfectly plain to anyone who will take the trouble to think. But people never take the trouble to ask questions, leave alone seeking answers. The one game of all games that really requires study before making a play is the one he goes into without his usual highly intelligent preliminary and precautionary doubts. He will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium-priced automobile."

Jesse Livermore

Radiative Levels 10 Million Times Higher Than Normal

Standing Right In Front Of Japan Tsunami

Japan Evacuating Now! Nuclear Meltdown!

An Australian in Japan expresses pain to the "end of Japan".

Saturday, March 26, 2011

Warren Buffett: The Economy Is Improving

"The economy of America, United States and others around the world are improving month-by-month.  It might not be quite as fast as everybody would like but it is happening."

Warren Buffett

Thursday, March 24, 2011

Marvin Schwartz: 2011 Predictions

Famed valued investor Marvin Schwartz is very bullish on M&A activity, Anardarko and IBM (a double by 2013). He recommends the CFTC to raise margin requirements on important commodities to prevent rampant speculation.

David Einhorn: This Is How I Roll

"The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom up” investor. Having my eyes open to the big picture doesn’t mean abandoning stock picking, but it does mean managing the long short exposure ratio more actively, worrying about what may be brewing in certain industries, and when appropriate, buying some just-in-case insurance for foreseeable macro risks even if they are hard to time."

David Einhorn

Monday, March 21, 2011

Paul Tudor Jones: I Blame Our Economic Malaise On Manipulation Of The Yuan And The Loss Of U.S. Labor To China

"The root cause of the unemployment woes is quite obvious. In the United States alone, in the last two decades, nearly six million jobs in manufacturing have been lost overseas. This equates to nearly four percentage points of the current 9.7% US unemployment rate. As importantly, the migration of these jobs contributed to the most unsustainable economic imbalance in the world today—China’s persistent bilateral trade surplus with the United States. During the last decade, China accumulated almost $1.4 trillion of US debt and at least $2.3 trillion in global assets. These figures could grow to $3.8 trillion and $7 trillion, respectively, over the next decade if the current renminbi/US dollar (RMB/USD) exchange rate continues to be artificially suppressed from appreciating."

Paul Tudor Jones

Paul Tudor Jones: The Market Is Like 1999

"Our current situation is highly reminiscent of 1999, when the fear of a Y2K computer meltdown led central banks to deliver global liquidity pulses in an effort to cushion any possible negative fallout from the failure of systems and the Internet. Once again, policy leaders symptomatically attacked a structural deficiency. Most of that excess liquidity ended up in a very narrow list of approximately 100 NASDAQ stocks, as $20B a month poured into margin accounts to purchase technology stocks.  Between October 1999 and March 2000, the NASDAQ nearly doubled.

With the Federal Reserve Board about the embark upon a LSAP program of over $1 trillion dollars, it is certainly important to understand exactly where much of this liquidity will roost. And the similarities between 1999 and today bear heeding."

Paul Tudor Jones

Jim Rogers: Close The Fed, Bananke Is A Contrary Indicator

Warren Buffett: Japanese Stocks Are Good Buys

"It will take some time to rebuild, but it will not change the economic future of Japan. If I owned Japanese stocks, I would certainly not be selling them. Frequently, something out of the blue like this, an extraordinary event, really creates a buying opportunity. I have seen that happen in the United States, I have seen that happen around the world. I don't think Japan will be an exception."

Warren Buffett

Saturday, March 19, 2011

Jim Rogers: I'm Concerned About The Yen

“I own the yen — more yen than most things.

I’m concerned. What do I do now? Obviously the yen cannot continue to be a good long.  Japan seems determined to debase the yen, which they may be about to do.”

Jim Rogers

Warren Buffett: How I Choose The Next Person To Run Berkshire Hathaway

"Four years ago, I told you that we needed to add one or more younger investment managers to carry on when Charlie, Lou and I weren’t around. At that time we had multiple outstanding candidates immediately available for my CEO job (as we do now), but we did not have backup in the investment area.

It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.

When Charlie and I met Todd Combs, we knew he fit our requirements. Todd, as was the case with Lou, will be paid a salary plus a contingent payment based on his performance relative to the S&P. We have arrangements in place for deferrals and carryforwards that will prevent see-saw performance being met by undeserved payments. The hedge-fund world has witnessed some terrible behavior by general partners who have received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their limited partners losing back their earlier gains. Sometimes these same general partners thereafter quickly started another fund so that they could immediately participate in future profits without having to overcome their past losses. Investors who put money with such managers should be labeled patsies, not partners.

As long as I am CEO, I will continue to manage the great majority of Berkshire’s holdings, both bonds and equities. Todd initially will manage funds in the range of one to three billion dollars, an amount he can reset annually. His focus will be equities but he is not restricted to that form of investment. (Fund consultants like to require style boxes such as “long-short,” “macro,” “international equities.” At Berkshire our only style box is “smart.”)

Over time, we may add one or two investment managers if we find the right individuals. Should we do that, we will probably have 80% of each manager’s performance compensation be dependent on his or her own portfolio and 20% on that of the other manager(s). We want a compensation system that pays off big for individual success but that also fosters cooperation, not competition.

When Charlie and I are no longer around, our investment manager(s) will have responsibility for the entire portfolio in a manner then set by the CEO and Board of Directors. Because good investors bring a useful perspective to the purchase of businesses, we would expect them to be consulted – but not to have a vote – on the wisdom of possible acquisitions. In the end, of course, the Board will make the call on any major acquisition.

One footnote: When we issued a press release about Todd’s joining us, a number of commentators pointed out that he was “little-known” and expressed puzzlement that we didn’t seek a “big-name.” I wonder how many of them would have known of Lou in 1979, Ajit in 1985, or, for that matter, Charlie in 1959. Our goal was to find a 2-year-old Secretariat, not a 10-year-old Seabiscuit. (Whoops – that may not be the smartest metaphor for an 80-year-old CEO to use.)"

Warren Buffett

Eddie Lampert: Letter To Shareholders

February 24, 2011
To Our Shareholders:
2010 was another challenging year for Sears Holdings. Our financial results remain at unacceptable levels, and we are working to drive better performance in both the short and long term. The company generates significant amounts of cash, and we have the ability and flexibility to invest that cash strategically. We will continue to make long-term investments in key areas that may adversely impact short-term results when we believe they will generate attractive long-term returns. In particular, we have significantly grown our Shop Your Way Rewards program, improved our online and mobile platforms, and re-examined our overall technology infrastructure. We believe these investments are an important part of transforming Sears Holdings into a truly integrated retail company, focusing on customers first.
Yesterday we announced the appointment of Lou D’Ambrosio as our Chief Executive Officer. From the beginning of our CEO search, we were determined to find a leader with information and technology experience who could catalyze the transformation of our portfolio of businesses in the context of the evolution of the retail industry that is occurring more broadly. Bruce Johnson has served the company in a dedicated and diligent manner as our Interim CEO. I want to thank Bruce for his leadership in executing our new organizational design and in managing the company through the economic and industry difficulties that were exacerbated by the recent economic and financial crises. The company is well positioned for this transition with a strengthened leadership team, experience in executing under the new organizational structure, and what we expect to be an improved economic and business climate going forward.
Let me introduce Lou to you. After a 16 year career at IBM, Lou joined Avaya in 2002 and served as its CEO from 2006 to 2008. After improving Avaya’s operating performance, Lou led Avaya through a going private transaction, delivering attractive returns to its shareholders. As some may know, Lou stepped down from Avaya to deal with a pressing health issue, and is now ready and able to lead once again. Lou’s information and technology background, leadership style, and experience in leading and transforming a Fortune 500 company make him a great fit for Sears Holdings.
Lou knows what it is like to be the 800-pound gorilla from his days at IBM, and he knows what it is like to compete against 800-pound gorillas from his days at Avaya. He also understands how technology can shape and change companies and industries. The profound changes that many industries, including retail, are currently experiencing require new thinking, new leadership and new business models. Information and technology have always been an important part of the supply chain in retail, but more and more it is becoming critical that we use information and technology in a much more profound way to deliver great customer experiences. Lou is a proven winner, and I am excited to have him as the leader of our company.
We continue to make changes in our broader leadership team, as we allocate more responsibility to leaders who have delivered results and seek to attract leaders who are capable of improving performance in areas that have lagged. In particular, we want leaders who are capable of transforming key aspects of our business, as retail is increasingly impacted by new technologies and social interaction. This requires us to part ways with some who have given great effort, but who have fallen short of the performance required for us to be competitive.

2010 in Review
While our financial performance was disappointing overall, the decline in profitability occurred within two segments: Sears Domestic and Sears Canada. In contrast, Kmart generated more than $500 million of Adjusted EBITDA, a year-on-year improvement of nearly 40%.
Kmart’s performance stabilized in 2010, with same store sales rising by 0.7% for the year and 2.5% in the fourth quarter. The Kmart business has become more responsive to our customers’ needs, both by offering more products customers want and by providing them with more ways in which to purchase them. The Kmart team has significantly enhanced its apparel offerings and upgraded its footwear business since assuming operation of the footwear business at the end of 2008. Both apparel and footwear generated meaningful profitability increases this year. Further, in 2010 Kmart launched the Smart Sense brand, a collection of value-oriented, private label food and consumable products.
The Kmart apparel business delivered notable sales and gross profit increases. This improvement was driven by a clear pricing message led by the Everyday Great Price initiative and enhanced product assortment across the board. Kmart also introduced several new brands, including Dream Out Loud by Selena Gomez and Bongo. In 2011, Kmart plans to launch Sofia Vergara as well as to improve the design and sourcing processes to bring fashion goods to our customers more quickly.
Meeting our customers’ needs entails more than just having the right assortment. It also includes providing them with additional payment and fulfillment options. Kmart has continued to expand its layaway program, which allows customers to cost-effectively finance their purchases. Customers are making greater use of layaway not just as a financing tool but also as a way to reserve items to pick up at a later date. In addition, we have expanded the ways our customers can receive their purchases, allowing our customers to buy online and pick up in store. This service, powered by MyGofer, is now available in over 600 Kmart stores via either or
Given the large proportion of the Sears Domestic business which is in “big ticket” categories and linked to housing and consumer credit, Sears is much more susceptible to the macro-economic environment than Kmart. But I don’t accept this as an excuse: our results at Sears in 2010 were completely unacceptable. The profit erosion at Sears Domestic occurred primarily in appliance-related businesses and in the Full-line Store apparel and consumer electronics businesses. I will address them in reverse order.
Consumer electronics, particularly televisions, experienced steep price declines throughout the year, which drove reduced revenues and margins across the industry. While it is well documented that this business has been challenged in recent years, I mention it because it illustrates how vital it is to adapt to market changes and constantly evolving technologies. When industry margins are shrinking, an organization must respond by adding new innovative products and bundling them with services and solutions that meet customers’ evolving needs.

Sears’ Full-line Store apparel business experienced a meaningful reduction in profitability as both sales and margin rate declined. This business has been disappointing for a long time and continues to be underproductive compared to our competitors. Last year, the business faced challenges associated with significant transitions in leadership and location, as a new merchandising team was hired in San Francisco last summer and a new leader was just put in place earlier this month. We believe that we have better talent in place now, and we expect them to make an impact immediately. In 2011, Sears apparel plans to launch UK Style by French Connection and the Kardashian Kollection and must work to improve the productivity and profitability of the business.
Finally, I want to comment on the appliances business. Appliances, our largest merchandise category, are a very important part of our franchise. They are sold in multiple retail formats across the enterprise as well as to commercial customers. They also drive sales of other products and services, such as protection agreements and delivery and installation services.
We are the market leader in appliances. We have sales more than 50% greater than those of our nearest competitor and are the only retailer to carry the top three appliance brands. In addition, we have our own services organization and a consultative sales force, known as the Sears Blue Appliance Crew. However, in spite of all these advantages, our performance was not acceptable in 2010. While this business is clearly highly dependent upon the macroeconomic environment, our own missteps exacerbated the situation, including delays in our transition to the newly redesigned Kenmore product line.
Greater share is not sufficient to win; to be a leader requires constant innovation and re-invention, something a leader is best positioned to do, but can often fail to leverage. The new management in our appliance business has already taken actions to rebuild leadership in this area and to further reinvigorate the Kenmore brand.
While the above three businesses brought down Sears Domestic profitability, the remaining Sears Full-line Store businesses improved their profitability over last year, including tools, lawn & garden, footwear, sporting goods, and fine jewelry.
In parallel to the efforts that we are making to increase the productivity of our Sears stores, we are also looking at adding world class third-party retailers to our space. Earlier this year we announced that Forever 21 will be taking over 43,000 square feet of Sears space at South Coast Plaza in Costa Mesa, CA, to operate a XXI Forever store (Forever 21’s upscale concept), which will open in April 2011. Whole Foods has plans to open a 34,000 square foot store in Greensboro, NC, in the spring of 2012. In addition, we opened 24 Lands’ End Canvas shops within Sears which is the new brand that Lands’ End launched last year targeting a younger customer.
Let me conclude the discussion of our 2010 operating performance by simply stating that the overall profit contribution from our businesses was not adequate. We are working diligently to improve our businesses, so that they create value every day.
Capital Structure and Capital Allocation
In October, we strengthened our capital structure by issuing $1.25 billion of 8-year senior secured notes at 6 5/8%. While the rate we paid was higher than we believe was appropriate given our financial condition and the collateral package backing the notes, issuing the notes allowed us to extend the maturities of our debt structure. In 2011, we have $425 million of term

debt coming due, of which $295 million has already been repaid, and we have continuing obligations under our pension plans.
In April, we had the opportunity to purchase an additional 17% of Sears Canada for $560 million, increasing our ownership from 73% to 90%. In 2010, Sears Canada has paid two dividends, which returned $639 million of cash to Sears Holdings. Of course, of the cash we received in dividends, we would have received $518 million without the additional shares purchased (because we already owned 73% of Sears Canada), so in effect we received $121 million in dividends on behalf of the additional shares purchased in 2010.
Despite the dividends paid, Sears Canada still has significant liquidity with more than $400 million of cash on hand, only $107 million of debt outstanding, and a market capitalization over $2 billion. Sears Canada’s operating performance declined significantly in 2010, and we expect that Dene Rogers and his team will work hard to correct the shortfalls and get Sears Canada moving back in the right direction again.
We invested more than $400 million in capital expenditures in 2010, including significant investments in stores in important markets, and contributed over $300 million to our pension and post-retirement plans. We invested just under $400 million in Sears Holdings share repurchases in 2010, a slight reduction from 2009.
As we have done since we took control of Kmart in 2003, we will continue to evaluate alternative uses of the company’s cash flow and capital resources to generate long-term value for all shareholders. Each year brings with it different circumstances, and we expect to have a variety of opportunities to invest our cash in the years to come. Our discipline in evaluating opportunities leaves us prepared to weather difficult times as well as to prosper when economic conditions improve.
Store Openings and Closings
Our continuous focus on improving our effectiveness and efficiency necessitates that we review our store portfolio on a regular basis. If a store is not generating, or predicted to improve enough to generate, an adequate return, we may choose to close it and redeploy resources elsewhere. Many of the closure decisions occur when we have a lease renewal option because, as a matter of policy, we review every store prior to exercising a renewal option, and we conduct that review in light of the store’s performance as well as other factors facing the company, our industry, and the economy in general including the changing regulatory environment. This is not a decision we take lightly. We recognize that closures will impact our associates, customers, and communities. However, it is an essential task. As a national retailer with around 3,500 domestic stores, as well as nearly 500 stores in Canada, we must react to changes which occur demographically and competitively and adjust our store base accordingly.
We not only adjust by changing the location of stores, but also by modifying the formats of our stores. Generally speaking, most of the stores we have closed over the past few years have been the larger Kmart and Sears Full-line stores. But over that same period we have also added a greater number of specialty stores. The specialty stores are intentionally smaller stores, making them far less costly and providing the opportunity to open them in many more potential locations. Also, we can sell expanded assortments in these locations, even if they are smaller in physical size through I have read much in the media about our store closures, but I rarely see a discussion of the stores we open. In 2010, while we closed a

combined 34 Kmart and Sears Full-line stores, our base of specialty stores increased by 122, including Hometown and Outlet stores in the United States and Dealer stores in Canada.
We have been working to improve our existing stores in a number of ways. First and foremost, we are using technology to transform our store experiences, and we continue to innovate as an integrated retailer, offering our customers a seamless experience across channels under the Shop Your Way banner. Shop Your Way represents our commitment to providing our customers the opportunity to buy whatever they want, wherever they want, and whenever they want. Second, we have developed a framework for experimentation across business units in some of our most important markets and have identified several initiatives to be rolled out further based on test results and customer feedback. Third, our efforts to improve basic store standards produced nearly double digit increases in our customer service scores year-over-year at both Sears and Kmart.
Building Closer Relationships with Customers
Improving our store experience is just one part of becoming the “go-to place” for our customers. We have focused much of our investment in emerging areas of retail like our online platforms and in our rewards program.
Our decisions to allocate capital in these areas are based on the expected future performance of the investments without worrying about the quarter-to-quarter reporting consequences. We will continue to invest in and develop business models in emerging areas because we believe they have the potential to make a significant difference to our associates, our customers, and our shareholders over time.
Shop Your Way Rewards
We launched our Shop Your Way Rewards program in 2009 and continued to grow membership and capabilities in 2010. We expect Shop Your Way Rewards to be even more important going forward in building lifetime relationships with our customers. Our goal is to have the best membership program in our industry and one that will extend beyond our retail stores alone to drive value for our members. Shop Your Way Rewards is consistent with the direction that we embarked on at the time of the Sears and Kmart merger when we emphasized the focus on relationships over transactions, on knowing our customers rather than just guessing at their wants and needs, and in becoming a more analytical, data-driven company.
The Shop Your Way Rewards program transitions Sears Holdings from serving customers to building relationships with members. Sears helped establish first the mail-order catalog and later the newspaper circular as foundational platforms for communicating with customers. These platforms were very effective, but suffer today from long lead times to execute and a lack of personalization. Each customer receives the same weekly ad delivered through their local newspaper. In the past, it was not until a customer arrived at one of our stores that we could begin a true relationship with them, and even then it was predominantly transactional.
Communicating with customers is a significant investment for retail companies like ours. Digital communication tools present a new opportunity to personalize our messages and make them more timely and engaging. It is less about the art of the discount and more about the art of being relevant to customers. We believe that successful retailers will be required to know their customers more intimately, and we intend to make the investments that will permit us to do this well.

2010 was a year of progress for our web and mobile properties. We expanded our assortment, improved site performance and our multichannel capabilities, created innovative mobile apps, and developed social capabilities. Several industry sources, including Gomez Inc. and Internet Retailer, recognized us for the speed and performance of our website during the holidays. ranked second in the e-tailing group 4th Annual Customer Experience Index for its site experience. Acquity Group named Sears Holdings “Overall Best-in-Class” for our mobile efforts, and the MySears Community was honored with a Stevie Award in the Retail Web Site & Blog category.
We grew our Marketplace assortment to more than 17 million items. The Marketplace provides sellers with access to our millions of customers through a variety of fulfillment options. We invite sellers looking for a new outlet and a partnership attitude to consider what we have to offer with Sears Marketplace (
As we establish relationships with Marketplace partners, being a responsible member of the community is not an afterthought. has threatened to terminate relationships with affiliate sellers in states where it might have to remit sales taxes. In a sense, not collecting taxes is a competitive advantage, but it is also a potential liability. As we said last year, we should level the playing field – either all retailers should be required to collect sales taxes or none should. As state and municipal governments face spiraling budget deficits, and as online retail grows, we believe an uneven playing field relating to the collection of sales taxes will exacerbate the financial troubles of local communities and economies. Sears Holdings is committed to mutually beneficial relationships with local business partners, affiliates, and communities.
MyGofer has expanded our fulfillment options in a variety of ways as well as serving as the engine behind additional integrated retail efforts. provides features and benefits designed to create a one-stop shopping experience, offering a range of quality products including groceries, prescriptions, health and beauty products, and electronics. MyGofer stands for speed and convenience – the same day you place your order, it is ready within hours with pickup now available in over 600 stores. In select cities – New York City, Los Angeles, Chicago, the Washington, DC, area, Miami, Atlanta, Philadelphia, Boston, San Francisco, Seattle, Denver, and Phoenix – our customers can access a variety of extended assortments and delivery options, including home and company delivery, directly through or our mygofer2go mobile app. For more information or to give it a try, please visit You can refer friends at or follow MyGofer on Facebook at
We deployed a variety of campaigns and applications to make our experiences more social, both on sites like Facebook and Twitter as well as on Social shopping platforms empower customers to get real-time feedback and recommendations from personal, extended, and local networks, thus allowing them to make more informed, smarter shopping decisions. A variety of different experiences are currently available on the web and on mobile phones that allow customers to take advantage of social tools including liking, sharing, rating, and reviewing products. We intend to build on our early learnings to make social shopping more central to our overall experiences.

Becoming an integrated retailer is critical to our future success. Over the past 12 months, both Blockbuster and Borders have filed for bankruptcy. They failed to adapt quickly enough to the profound changes taking place in their businesses. Their competitors anticipated the shift in customer shopping patterns and entirely disrupted the way books, music, and movies are being purchased and consumed today.
The investments we have made in our online properties will continue. By integrating our vast store network with our world-class online properties, we believe that Sears Holdings will be a winner in the rapidly evolving retail environment. The web and mobile platforms integrate shopping and marketing in a very different way than stores and traditional media have in the past. Our associates are learning new skills, and we are creating new types of jobs that require us to recruit, train, and develop people who excel in technology and information management.
Public Policy
Often, when I read or hear about people discussing creating jobs, the descriptions reflect a lack of understanding about jobs in general and about how and why jobs get created. Sears is one of the world’s largest employers. Furthermore, we have a great interest in more people getting back to work and staying employed, both because it makes for a better society and because people who are getting a paycheck have a greater ability and willingness to shop our stores and websites.
A business or person hires somebody when there is some type of work to be performed and the price to perform the work is both affordable and attractive. Any business with resources can hire additional people. But, unless they have work for them to perform, and unless the work and the cost can be translated into products or services that others will pay for, the job is not likely to be sustainable. In other words, it is possible to be employed but not actually have a job, if you define a job as having productive employment. Of course, that is a subjective decision for each person or business to make, but the distinction is nonetheless important.
If money were the only thing required to create jobs, then there are plenty of companies with the ability to hire workers. Let’s take a look at five of the most profitable companies in technology– Apple, Cisco, Microsoft, Oracle, and Google. Each of these companies has over $20 billion in cash and short-term investments on its balance sheet and is hugely profitable. If each company wanted to, it could hire 10,000 people and pay them $50,000 per person, for an annual cost of $500 million. There’s only one problem. What would all these people do? If there were productive work for them to do, then these companies would surely hire additional people. They already employ tens of thousands of people and their businesses support the employment of millions of people in related businesses of their suppliers and customers.
Business leaders don’t sit around thinking, “How can we create more jobs?” They think about, “How can we create more value?” or, “How can we create more and better products?” or, “How can we grow our company?” The addition of new jobs in any business is driven by these types of questions and answers to them. When business leaders are summoned to Washington for ideas on how to create more jobs, it is hard to imagine how these conversations will actually produce more jobs, because they fail to address the real questions that drive businesses and hence job creation.
Increasing taxes and regulation creates uncertainty for private businesses and individuals, which is exactly what inhibits job creation in the first place and may even make it harder for employers to maintain current levels of employment. Taxes remove resources from productive

enterprises and individuals. Regulations restrict freedom to compete on different business models and rules. Whether businesses or individuals can “afford” to pay these taxes or “live” with these rules is beside the point. Risk taking by individuals and businesses is the leading generator of job creation, and increasing regulation and taxation almost always reduces risk taking.
Too often, the focus on job creation is on small businesses. One hears about how small businesses are the source of most job growth. What this ignores is the fact that large businesses are large because they service a large number of customers and typically employ large numbers of people as well. It is not just the growth in jobs that is required to keep people employed; it is the sustainability and maintenance of jobs that is really the most important factor. A company with 100,000 employees that can’t sustain that employment and cuts 5,000 jobs requires a large number of small businesses to generate the additional jobs to offset that loss of 5,000 jobs. So, when you hear policymakers talking about increasing taxes and regulations in one breath while encouraging job creation in the next breath, please remember that larger businesses also need to do well to keep the overall employment picture healthy.
That is not to say that the government should favor large businesses. It should not. The government should stay out of business as much as possible. Wherever possible it should reduce its role. For those who believe in bigger government and more regulation, I would only say that they should recognize the consequences of those beliefs. For many people, that means fewer jobs available and less hope for new jobs. It may also mean the creation of jobs that are not needed and that will prove to be unsustainable.
And we should not look to government to “create jobs.” Having the government hire people into jobs that are not useful is a waste of society’s resources. Full employment can be maintained in socialist societies for only so long, as Russia and China found out the hard way. China is now creating many new jobs every year by unleashing the forces of capitalism and allowing its citizens the opportunity to take risks unlike ever before. For those who are truly interested in seeing jobs maintained and created, we have to recognize that productive jobs cannot be created out of thin air.
Most importantly, jobs require a matching of skills with needs. When there is a mismatch, education and training are needed to redress the imbalance. This also requires those seeking a job to make the effort to learn a new skill and to recognize that their abilities in the new area may not match their abilities in their prior employment. This may mean they make less money, but at least they will have a job, and society will benefit from having jobs that produce value to others. At Sears Holdings, we are creating many new job descriptions for jobs that didn’t exist even two years ago, as the changing landscape of technology in retail is reshaping our organization and the type of work we need performed every day.
Shareholder Value
In 2010, Apple surpassed Microsoft in total market capitalization, making it the most valuable technology company in the world and the second most valuable company overall after Exxon Mobil.
In Apple’s case, its market capitalization increase has been driven by two factors. First, Apple has delivered incredible improvements in operating performance resulting from a decade of innovation, both in product design and in business model. The creation of iTunes and the App Store coupled with the creation of the iPod and the iPhone defied the conventional wisdom that

success required open systems. At a time of increasing openness and interoperability of software and hardware, Apple promoted its own proprietary systems, keeping tight control over the design and integration of its products and the applications that make them useful. It developed a system for protecting the intellectual property of music companies and a system for promoting the properties of independent application developers based upon a combination of ratings and micropayments.
Second, Apple has neither repurchased shares nor paid a dividend since 2003. Currently, Apple sits on about $60 billion of cash and investments, while generating almost $20 billion in cash (after-tax) over the last year. It is the combination of spectacular operating performance and cash retention that has led to a market capitalization that eclipses all but Exxon Mobil.
In contrast, over the past four years, Microsoft has repurchased around $40 billion of its own shares, in addition to paying out almost $18 billion of dividends, for a total of almost $60 billion or about the same amount of cash that Apple currently carries on its balance sheet. Despite this, Microsoft still carries almost $50 billion in cash and investments. Had Microsoft set a goal to have its overall market value be higher than other companies, there are many things it could have done to make this happen, including not repurchasing shares or paying dividends.
Suppose, for example, that Microsoft had not returned $60 billion in cash to shareholders over the past four years. In that case, its market capitalization would have been $60 billion higher than it is today. Meanwhile, suppose that Apple returned to shareholders the $60 billion in cash and investments currently on its balance sheet. Then Microsoft’s market capitalization would currently be higher than Apple’s. The point is that the attention some have placed on overall market value rather than per share value is misplaced from the vantage point of an investor in a company. Sheer size may make for interesting headlines, but it may distract from doing the optimal things for the shareholders of a business. (Apple’s per share performance, by the way, has also been spectacular.)
If one owns 10% of a company, or 1% of a company or .0000001% of a company, what matters is how that investment fares over time. A company worth $1 billion that doubles in value to $2 billion only doubles an owner’s investment if the number of shares outstanding remains constant. Merging with another company with a $1 billion market capitalization and issuing shares to effect that merger would leave the 10% owner of a $1 billion company with a 5% stake in a $2 billion market value company. In both cases, the value of that investment is $100 million. Taking that logic down to the lowest possible unit, 1 share, serves to demonstrate and emphasize the logic of focusing on per share value as the key measure for shareholders.
At Sears Holdings, we seek to create long-term value for our shareholders. Like Apple, we seek to do so by improving our operating performance, innovating, and delighting customers. In this area, we have fallen far short of our goals and what we aspire to do in the future. On the second dimension of capital allocation, I believe that our behavior and focus has served our shareholders well over the past eight years and will magnify the value creation when our operating performance improves. We built cash when we felt that it was the right decision for our shareholders, and we delivered cash to those who elected to sell their shares when we felt that it was the right thing to do.
Share repurchases are not a panacea, nor are they a singular strategy. Yet, they are more than just the return of capital to shareholders. They represent an investment by the non-selling shareholders in the future of the business and the company. By repurchasing shares from selling shareholders, the remaining shareholders increase their ownership stake, thereby taking

the additional risk and additional upside potential based upon future performance. When coupled with outstanding operating performance, share repurchases magnify returns. When the price paid is attractive relative to future performance, share repurchases magnify returns. As a form of discipline on alternative capital allocation strategies, share repurchases can magnify returns. But, at the wrong price, with poor future performance, share repurchases can harm returns.
Despite our challenging performance over the past several years, the difficult economic environment, and the dramatically changing retail environment, we have generated very attractive returns for shareholders since May 2003, when we assisted Kmart in its emergence from bankruptcy. Others in our industry have grown their revenues since that time, some have grown their profits, but many have been unable to deliver shareholder performance in the past eight years.
In order for us to fulfill the potential of the company, we need to improve. We will continue to provide great opportunities for talented individuals to run businesses, while holding them accountable for performance. We have a need to manage the scale of our operations at the same time as we transform them. The activities required for transformation are vast and time-consuming. As the retail industry is reinvented, we intend and expect Sears Holdings to be a significant player in this reinvention. By aligning our associates with our customers, not with our stores or products, we believe this reinvention will play out in our favor.
Thank you for your patience and your trust.
Edward S. Lampert

Ralph Wanger: Predicting The Market Future Is For Fools

"If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you."

Ralph Wanger

Carl Icahn: Avoid Following The Crowd

"When most investors, including the pros, all agree on something, they're usually wrong."

Carl Icahn

Friday, March 18, 2011

David Dreman: How To Make Money In Stocks

"If you have good stocks and you really know them, you'll make money if you're patient over three years or more."

David Dreman

Ed Seykota On The Growth Of A Trader

"I don't think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change, or find a new set of rules he can follow. This seems to be part of the process of evolution and growth of a trader."

Ed Seykota

Thoughts For Monday

We should get a big gap up and rally on Monday, barring any major earthquake/tsunami this weekend.  The idea is to get long into the weekend, but without margin or excess margin.

Banks like WFC and JPM ought to move higher next week.

Tech stocks like AAPL and GOOG should lead the market higher next week.

Warren Buffett Loves His Goldman Sachs Investment

“Goldman Sachs has the right to call our preferred on 30 days notice, but has been held back by the Federal Reserve (bless it!), which unfortunately will likely give Goldman the green light before long.”

Warren Buffett

Goldman Sachs pays back Warren Buffett.

How Bill Gates Made $350 Million At Age 30 During Microsoft's IPO

Inside the deal that made Bill Gates, age 30, $350,000,000                                                                

The Financial Crisis Has Ended

For release at 11:00 a.m. EDT

The Federal Reserve on Friday announced it has completed the Comprehensive Capital Analysis and Review (CCAR), its cross-institution study of the capital plans of the 19 largest U.S. bank holding companies.

As a result of the CCAR, some firms are expected to increase or restart dividend payments, buy back shares, or repay government capital. The Federal Reserve on Friday will discuss the reviews and its decisions with firms that requested a capital action. All 19 firms will receive more detailed assessments of their capital planning processes next month.

In February 2009, the Federal Reserve advised bank holding companies that safety and soundness considerations required that dividends be substantially reduced or eliminated. Since that time, the Federal Reserve has indicated that increased capital distributions would generally not be considered prudent in the absence of a well-developed capital plan and a capital position that would remain strong even under adverse conditions.

The Federal Reserve's actions on capital distributions come after significant improvement in both economic conditions and the capital positions of financial institutions. From the end of 2008 through 2010, common equity increased by more than $300 billion at the 19 largest U.S. bank holding companies. Moreover, conclusion of the Basel III agreement to increase capital requirements and passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act have substantially clarified the regulatory environment in which these firms will be operating. The return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks' long-term access to capital. Such access will support lending to consumers and businesses. The capital plan reviews foster appropriate capital distributions in a measured fashion while still helping to ensure continued increases in firms' capital bases.

These supervisory reviews by the Federal Reserve come in the context of a significant change in supervisors' expectations for firms' substantive capital policies and capital planning processes. Among other things:
  • Firms are expected to demonstrate their ability to remain viable financial intermediaries as they make the planned capital distributions, even under stressed conditions;
  • Firms are expected to continue to increase their capital base;
  • In 2011, firms generally are expected to limit dividends to 30 percent or less of anticipated earnings;
  • Planned share repurchases will be reviewed if there are material adverse deviations from the revenue and loss assumptions in a firm's capital plan such that capital is not increasing as anticipated; and
  • In the event of a sharp deterioration in economic conditions that could have negative implications for safety and soundness, the Federal Reserve may require modification of previously submitted capital plans.
The CCAR involves a forward-looking, detailed evaluation of capital planning and stress scenario analysis at the 19 large bank holding companies. Although it was not standardized to the degree the Supervisory Capital Assessment Program (SCAP) was in early 2009, it builds on the experience gained during that exercise. In the CCAR, the Federal Reserve assessed the firm's ability, after taking into account the proposed capital actions, to maintain sufficient capital levels to continue lending in stressed economic environments, including under an adverse scenario specified by the Federal Reserve. The adverse scenario was intended to represent developments in a typical recession, with a decline in economic growth, a rise in unemployment, and a sharp drop in risky asset prices (for details, please see Comprehensive Capital Analysis and Review: Objectives and Overview, attached). Federal Reserve supervisors carefully analyzed and adjusted as appropriate projections of stressed revenues and losses provided by the firms in the CCAR.

It is important to note that there are a number of reasons why firms participating in the CCAR may not be making capital distributions this quarter. For example, a firm may not have requested approval of any such action, Federal Reserve supervisors may have believed a requested distribution was too high at this time and could weaken the firm's ability to weather adverse economic conditions, or supervisors may not have been comfortable with the capital planning process underlying the request. Firms may resubmit capital proposals each quarter, with their prospects for an answer of no objection dependent on their responses to any concerns raised during the CCAR.

Federal Reserve System

Thursday, March 17, 2011

Jim Berkland: Massive Earthquake Coming To California March 19-26

The End Of Times

Warren Buffett's Interview With The Financial Crisis Inquiry Commission

Transcript of Warren Buffett Interview With FCIC                                                                

Tuesday, March 15, 2011

Michael Lewis (1989): How A Tokyo Earthquake Could Devastate Wall Street And World Economy

michael lewis japan quake 1989                                                                 
via Infectious Greed

Marc Faber On Japan And QE7

Ray Dalio: Be An Independent Thinker

"In order to make money in the market, you have to be an independent thinker."

Ray Dalio

Monday, March 14, 2011

Robert Shiller: Market Dropped For 5 Consecutive Days After 1995 Kobe Quake

Jim Rogers: Japan Will Result In More Buying Of Commodities

"This is going to increase demand for many commodities. This is the new source of demand for copper and lead and things that nobody expected of new demand coming out of Japan, now there is a lot of new demand coming out of Japan. If the rest of the world goes into an economic slowdown because of this, then governments around the world are going to print even more money, that is the wrong thing to do but that is what they will do and whenever they print money, it is good for real asset, commodities."

Jim Rogers

Jim Rogers: Japan Is A Buying Opportunity

"Normally whenever there is an artificial event like this, it is a terrible tragedy, but also buying opportunity because we assume we are not going to have gigantic earthquakes every year. So it is normally a buying opportunity. It is a question of when you step in to buy."

Jim Rogers

Sunday, March 13, 2011

Seth Klarman's 2010 Letter: Our National Predicament

Two problems are upon us at once: short-term stimulus that is unaffordable over the long run and runaway entitlements that must be reined in. But restoring fiscal sanity will be bad for the economy and financial markets. What Treasury official or politician would want the cash spigot turned off before a recovery is certain? Recipients of government handouts – a large percentage of the population – would grumble at the termination of policies that offer them outsized benefits. So prepare for a chorus of "but not yet.” One already sees this in editorials and commentaries, such as the ones saying it's time to close down bankrupt Fannie Mae and Freddie Mac, but not yet, because doing so would harm the still-weak housing market. There will never be a good time to end housing support programs, reverse quantitative easing policies, end fiscal stimulus, or reduce massive budget deficits – because doing so will restrict growth and depress share prices. Nor will there be a good time to cut entitlement programs or to solve Social Security or Medicare underfunding. All will agree the stimulus cannot go on forever, that excessive entitlements must be reined in, “but not yet.

The financial collapse of 2008 highlighted our national predicament. The sudden decline in consumer activity that followed the plunges in the housing and stock markets represented a reasonable – indeed a desirable – response to overindebtedness. Yet the federal government saw this well-advised retrenchment as cataclysmic, because the national economy had grown dependent on our living beyond our means. The imagination of our financial leaders remains so shallow that their response to a crisis caused by overleverage and excess has been to recreate, as nearly as possible, the conditions that fomented it, as if the events of 2008 were a rogue wave of financial woe that can never recur. It is only in Fantasyland that the solution to vastly excessive debt is more debt and the answer to overconsumption is less saving and more spending. Worse still, we have yet to see a serious assessment by policymakers of the causes of the 2008 financial market and economic collapses so that we might take action to ward off a repeat performance. The government’s knee-jerk response to contraction was to prop up economic activity by any and every means possible; the hole in consumer activity had to be materially repaired on the government tab. While Treasury Secretary Timothy Geithner ingenuously professes a belief that the U.S. will never lose its AAA rating, Moody's recently warned that, absent a change, a downgrading could be just around the comer. Or, in the words of David Letterman, "I heard the U.S. debt may now lose its triple-A rating. And I said to myself, well who cares what the auto club thinks."

Most of us learned about the Great Depression from our parents or grandparents who developed a "Depressionmentality," by which for decades people shunned leverage, embraced thrift, and thought twice before quitting their secure jobs to join risky ventures. By bailing out the economy rather than allowing the pain of the economic and market collapses to be felt, the government has endowed our generation with a "really-bad-couple-of-weeks-mentality": no lasting lessons are learned; the government endlessly intervenes in the economy, and, ironically, the first thing to strongly rebound from the 2008 collapse isn't jobs or economic activity but speculation.

Benjamin Graham's margin-of-safety concept – to invest at a sufficient discount so that even bad luck or the vicissitudes of the business cycle won't derail an investment – is applicable to the economy as a whole. Bridges intended for ten-ton trucks are overbuilt by engineers to hold vehicles of 30 tons. Responsible investors assume their best judgments will sometimes go awry and insist on bargain purchases that allow room for error. Likewise, an economy built with no margin of safety will eventually implode. Governments that run huge deficits, promise entitlements that will be next-to impossible to deliver, and depend on the beneficence of foreigners to stay afloat inevitably must collapse – perhaps not imminently but eventually, as Greece and Ireland have recently discovered.

It is clear, both in the financial markets and in government policy, that no long-term lessons have been drawn from the events of 2008. A friend recently posited that adversity is valuable not for what it teaches but for what it reveals. The current episode of financial adversity reveals some unpleasant truths about the character and will of our country and its leaders, and offers an unpleasant picture of the future that awaits, unless we quickly find a way to change course.

The Demonization of Short-Seller

While we rarely sell securities short – both because of the degree of execution difficulty and theoretically unlimited risk compared to limited potential return – we do believe that short-selling serves a vitally important function. Markets, of course, fluctuate; driven by human emotion, greed, and fear, they can reach significantly overvalued levels. This is bad, both because it can induce some who cannot afford losses to speculate, and because it can lead to an improper allocation of society's resources. The recent housing bubble illustrates the problem: excessive home prices led to excessive home building, eventually resulting in a price collapse, large loan losses, and great personal hardship. In addition, the decline that follows periods of market overvaluation is bad for the broader economy, for confidence, and for rational decision making; it also frequently triggers government intervention in markets, with all of its inevitable distorting effects. Just as value buyers can dampen downside volatility, short-sellers can dampen the upside excesses. They don't actually change the eventual outcomes, just help us get there sooner. This makes short-sellers unpopular, as the uninformed masses enjoy high and rising securities prices for the short-term profits they produce, without understanding the societal costs of the future reversal. The less you understand valuation, the more that overvaluation seems like a free lunch – which of course it isn't.

From our experience, much long-oriented analysis is simplistic, highly optimistic, and sloppy. Short-sellers, by going against the long-term tide of economic growth and the short-term swells of public opinion and margins calls, are forced to be crackerjack analysts. Their work product is usually top-notch and needs to be. Short-sellers shouldn't be reviled or banned; most should be celebrated and encouraged. They are the policemen of the financial markets, identifying frauds and cautioning against bubbles. In effect, they protect the unsophisticated from predatory schemes that regulators and enforcement agencies don't seem able to prevent.

Moreover, the short-seller who is fundamentally wrong, who mistakenly sells short an undervalued security, will lose money and, if the pattern continues, will eventually go broke. Short-sellers, like long-only buyers, need to be right more than they are wrong; when they are right, their actions are socially beneficial, not harmful. The only exception to this point, the only danger short-sellers pose to society, is when, in the equivalent of yelling "fire" in a crowded theatre, they spread false rumors that prevent a company that needs regular financing (such as brokerage firms) from being funded. Then, their predictions become self-fulfilling prophecies, enabling them to profit, whether or not they were fundamentally correct; they may actually be able to change the outcome. Yet, even in this situation, one may wonder whether any company – or highly leveraged government, for that matter – should employ a funding model that depends on perpetual access to the capital markets, which are notoriously fickle, volatile, subject to the influence of malicious gossip, and short-term oriented. In any event, mechanisms such as the uptick rule and rules against market manipulation already exist to prevent such misbehavior by short-sellers.

A Framework for Investment Success

Two elements are vital in designing an investment approach for long-term success. First, answer the question, ''what's your edge?" In highly competitive financial markets, with thousands of very smart, hardworking participants, what will enable you to reliably outperform the field? Your toolkit is critically important: truly long-term capital; a flexible approach that enables you to move opportunistically across a broad array of markets, securities, and asset classes; deep industry knowledge; strong sourcing relationships; and a solid grounding in value investing principles.

But because investing is, in many ways, a zero-sum activity in which your returns above the market indices are derived from the mistakes, overreactions or inattention of others as much as from your own clever insights, there is a second element in designing a sound investment approach: you must consider the competitive landscape and the behavior of other market participants. As in football, you are well-advised to take advantage of what your opponents give you: if they are defending the run, passing is probably your best option, even if you have a star running back. If scores of other investors are rigidly committed to fast-growing technology stocks, your brilliant tech analyst may not be able to help you outperform. If your competitors are not paying attention to, or indeed are dumping, Greek equities or U.S. housing debt, these asset classes may be worth your attention, regardless of the currently poor fundamentals that are driving others' decisions. Where to best apply your focus and skills depends partially on where others are applying theirs.

When observing your competitors, your focus should be on their approach and process, not their results. Short-term performance envy causes many of the shortcomings that lock most investors into a perpetual cycle of underachievement. You should watch your competitors not out of jealousy, but out of respect, and focus your efforts not on replicating others' portfolios, but on looking for opportunities where they are not.

Much of the investment business is centered around asset-gathering activities. In a field dominated by a short-term, relative performance orientation, significant underperformance is disastrous for retention of assets, while mediocre performance is not. Thus, because protracted periods of underperformance can threaten one's business, most investment firms aim for assured, trend-following mediocrity while shunning the potential achievement of strong outperformance. The only way for investors to significantly outperform is to periodically stand far apart from the crowd, something few are willing or able to do.

In addition, most traditional investors are limited by a variety of constraints: narrow skill-sets, legal restrictions contained in investment prospectuses or partnership agreements, or psychological inhibitions. High-grade bond funds can only purchase investment-grade bonds; when a bond falls below BBB, they are typically forced to sell (or think that they should), regardless of price. When a mortgage security is downgraded because it will not return par to its holders, a large swath of potential purchasers will not even consider buying it, and many must purge it. When a company omits a cash dividend, some equity funds are obliged to sell that stock. And, of course, when a stock is deleted from an index, it must immediately be dumped by many. Sometimes, a drop in a stock's price is reason enough for some holders to sell. Such behavior often creates supply-demand imbalances where bargains can be found. The dimly lit comers and crevasses existing outside of mainstream mandates may contain opportunity. Given that time is often an investor's scarcest resource, filling one’s in-box with the most compelling potential opportunities that others are forced to or choose to sell (or are constrained from buying) makes great sense.

Price is perhaps the single most important criterion in sound investment decision making. Every security or asset is a "buy" at one price, a “hold” at a higher price, and a "sell" at some still higher price. Yet most investors in all asset classes love simplicity, rosy outlooks, and the prospect of smooth sailing. They prefer what is performing well to what has recently lagged, often regardless of price. They prefer full buildings and trophy properties to fixer-uppers that need to be filled, even though empty or unloved buildings may be the far more compelling, and even safer, investments. Because investors are not usually penalized for adhering to conventional practices, doing so is the less professionally risky strategy, even though it virtually guarantees against superior performance.

Finally, most investors feel compelled to be fully invested at all times – principally because evaluation of their performance is both frequent and relative. For them, it is almost as if investing were merely a game and no client's hardearned money was at risk. To require full investment all the time is to remove an important tool from investors' toolkits: the ability to wait patiently for compelling opportunities that may arise in the future. Moreover, an investor who is too worried about missing out on the upside of a potential investment may be exposing himself to substantial downside risk precisely when valuation is extended. A thoughtful investment approach focuses at least as much on risk as on return. But in the moment-by-moment frenzy of the markets, all the pressure is on generating returns, risk be damned.

What drives long-term investment success? In the Internet era, everyone has a voluminous amount of information but not everyone knows how to use it. A well-considered investment process – thoughtful, intellectually honest, teamoriented, and single-mindedly focused on making good investment decisions at every turn – can make all of the difference. Investors with short time horizons are oblivious to kernels of information that may influence investment outcomes years from now. Everyone can ask questions, but not everyone can identify the right questions to ask. Everyone searches for opportunity, but most look only where the searching is straightforward even if undeniably highly competitive.

In the markets of late 2008, everything was for sale as investors were caught in a contagion of selling due to panic, margin calls, and investor redemptions. Even while modeling very conservative scenarios, many securities could have been purchased at extremely attractive prices – if one had capital with which to buy them and the stamina to hold them in the face of falling prices. By late 2010, froth had returned to the markets, as investors with short-term relative performance orientations sought to keep up with the herd. Exuberant buying had replaced frenzied selling, as investors purchased securities offering limited returns even on far rosier economic assumptionss.

Most investors take comfort from calm, steadily rising markets; roiling markets can drive investor panic. But these conventional reactions are inverted. When all feels calm and prices surge, the markets may feel safe; but, in fact, they are dangerous because few investors are focusing on risk. When one feels in the pit of one's stomach the fear that accompanies plunging market prices, risk-taking becomes considerably less risky, because risk is often priced into an asset's lower market valuation. Investment success requires standing apart from the frenzy – the short-term, relative performance game played by most  investors.

Investment success also requires remembering that securities prices are not blips on a Bloomberg terminal but are fractional interests in – or claims on – companies. Business fundamentals, not price quotations, convey useful information. With so many market participants fixated on short-term investment performance, successful investing requires a focus not on how one is doing, but on corporate balance sheets and income and cash flow statements.

Government interventions are a wild card for even the most disciplined investors. On one hand, the U.S. government has regularly intervened in markets for decades, especially by lowering interest rates at the first sign of bad economic news, which has the effect of artificially inflating securities prices. Today, monetary easing and fiscal stimulus augment consumer demand, increasing risks not only regarding the integrity and sustainability of securities prices but also those surrounding the sustainability of business results. It is hard for investors to get their bearings when they cannot readily distinguish durable business performance from ephemeral results. Endless manipulation of government statistics adds to the challenge of determining the sustainability – and therefore the proper valuation – of business performance. As securities prices are propped up and interest rates are manipulated sharply lower (thereby justifying those higher prices in the minds of many), prudent investors must demand a wide margin of safety. This is especially so because financial excesses contain the seeds of their own destruction. Market exuberance leads to business exuberance – production of more goods and services than demand ultimately justifies. Of course, when market and economic excesses are finally corrected, there is a tendency to over-shoot, creating low-risk opportunities for value investors who have remained patient and disciplined.

Yet another long-term risk confronts investors: the government's fiscal and monetary experiments may go awry, resulting in runaway inflation or currency collapse. Bottom-up value investors would not wish to bet the ranch on a macroeconomic view, but neither would they be wise to ignore the macroeconomy altogether. Disaster hedging – always an important tool for investors – takes on heightened significance in today's unprecedentedly challenging environment. Yet, as this insight is not unique to us, the cost of insurance is high. There are no easy ways to navigate these turbulent waters. But because the greatest risks are of currency debasement and runaway inflation, protection against a currency collapse – such as exposure to gold – and against much higher interest rates seem like necessary hedges to maintain.