3/18/2006 newsletter
*** Market
Of course, it is a good week. SP500, , advancing 2%, moved above 1300 for the first time in 5 years (I thought we could get there last Dec). My portfolio rose to $13.28 (+12% YTD) following Russell 2000's new high. I want the market to correct, but it does not seem to be going down...
Market is full of enthusiasm that we are beyond the dot com bubble and the dreadful financial squeeze of 2002. Some Wall Street firms (LEH, GS) are extremely profitable, in contrast to the struggling semi and software industries. Mergers and corporate restructuring continue in a fast pace. I was reading some article about Graham/Buffett. People went through 1929 crash and would forever remembered the peak (DJIA=380). Even after 20 years, Graham worried DJIA would drop off the toilet again. Who knows we are in that situation again? Graham advised Buffett in 1949 to work in a stable company, wait to come back to Wall Street until the crash is over. Buffett did not listen to him, and 1949 is the onset of the great bull market of next 10 years when DJIA rose from 200 to 1000 in 1960.
(However, I also found that there are some characteristics of Buffett not so easy to "imitate", contrary to the generally perceived. He is a genius on numbers since very young age. He began his "career planning" at age 5. He quited Wharton at age 19, expressing there is nothing to be learned from professors there. He read 2000 annual reports every year. He was surrounded by the top-notch financial minds of 40's and 50's, among which he was the best, and Graham thought Buffett was the brightest disciple of his when he was only 25, which was ridiculed by some participants. Yet Buffett waited 20 years to take over GEICO, the crown jewel of Graham's investment, when GEICO was messed up in 1974 and stock dropped to $3.)
You may hear gurus like Bill Gross and Buffett himself voice a low-return (low means ~6%) period ahead in US (like 70's). They may be right, or may be wrong just like Graham in the 50's. Even in an overall depressing environment like 70's, Berkshire still grew leaps and bounces. People are scrambling to find where the high growth stuff is. Maybe India, China, small-cap, new IPOs, some developing countries, whatever... I have my own method of finding them (with some tolerance of error)...
(Note: A general prosperous impression of an emerging market, such as China, does not necessarily translate to a sure success of investing in public companies there. For example, Shanghai stock exchange has gone through 8 years of bear market while China is growing 10% every year. However, FXI index seems to do quite well.)
I am studying 6-Sigma stuff lately (Merck wants to become a 6-Sigma company). 6-Sigma means you can control a process to produce less than 3.3 defects per million opportunities. I found the topic very interesting because 6-Sigma is very similar to my stochastic approach to stock market (where 1-2 Sigma is the norm). It is mathematical, use statistics (quantitative analysis) to control the variation of product quality and improve financial performance. "Variation is evil" it says. And there is Lean Six Sigma. Lean is a methodology to improve speed and waste. Speed and quality under statistical control (instead of some ego-centric managers) gives a company a winning edge against those low quality peers. Most amazingly, these stuff can also be applied to service organization, where everything goes, bugs are flying every day, fire fighting is a highly-prized heroic activity... Speaking of insanity...
--Steve
Of course, it is a good week. SP500, , advancing 2%, moved above 1300 for the first time in 5 years (I thought we could get there last Dec). My portfolio rose to $13.28 (+12% YTD) following Russell 2000's new high. I want the market to correct, but it does not seem to be going down...
Market is full of enthusiasm that we are beyond the dot com bubble and the dreadful financial squeeze of 2002. Some Wall Street firms (LEH, GS) are extremely profitable, in contrast to the struggling semi and software industries. Mergers and corporate restructuring continue in a fast pace. I was reading some article about Graham/Buffett. People went through 1929 crash and would forever remembered the peak (DJIA=380). Even after 20 years, Graham worried DJIA would drop off the toilet again. Who knows we are in that situation again? Graham advised Buffett in 1949 to work in a stable company, wait to come back to Wall Street until the crash is over. Buffett did not listen to him, and 1949 is the onset of the great bull market of next 10 years when DJIA rose from 200 to 1000 in 1960.
(However, I also found that there are some characteristics of Buffett not so easy to "imitate", contrary to the generally perceived. He is a genius on numbers since very young age. He began his "career planning" at age 5. He quited Wharton at age 19, expressing there is nothing to be learned from professors there. He read 2000 annual reports every year. He was surrounded by the top-notch financial minds of 40's and 50's, among which he was the best, and Graham thought Buffett was the brightest disciple of his when he was only 25, which was ridiculed by some participants. Yet Buffett waited 20 years to take over GEICO, the crown jewel of Graham's investment, when GEICO was messed up in 1974 and stock dropped to $3.)
You may hear gurus like Bill Gross and Buffett himself voice a low-return (low means ~6%) period ahead in US (like 70's). They may be right, or may be wrong just like Graham in the 50's. Even in an overall depressing environment like 70's, Berkshire still grew leaps and bounces. People are scrambling to find where the high growth stuff is. Maybe India, China, small-cap, new IPOs, some developing countries, whatever... I have my own method of finding them (with some tolerance of error)...
(Note: A general prosperous impression of an emerging market, such as China, does not necessarily translate to a sure success of investing in public companies there. For example, Shanghai stock exchange has gone through 8 years of bear market while China is growing 10% every year. However, FXI index seems to do quite well.)
I am studying 6-Sigma stuff lately (Merck wants to become a 6-Sigma company). 6-Sigma means you can control a process to produce less than 3.3 defects per million opportunities. I found the topic very interesting because 6-Sigma is very similar to my stochastic approach to stock market (where 1-2 Sigma is the norm). It is mathematical, use statistics (quantitative analysis) to control the variation of product quality and improve financial performance. "Variation is evil" it says. And there is Lean Six Sigma. Lean is a methodology to improve speed and waste. Speed and quality under statistical control (instead of some ego-centric managers) gives a company a winning edge against those low quality peers. Most amazingly, these stuff can also be applied to service organization, where everything goes, bugs are flying every day, fire fighting is a highly-prized heroic activity... Speaking of insanity...
--Steve
posted by Steve at 4:15 PM
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