My Amazon Review of Benjamin Graham's and Jason Zweig's (Ed) "The Intelligent Investor (Rev. Ed.)"

 Margin of Safety

 I just finished rereading “The Intelligent Investor,” a book a I read many years ago and much of its investment insights are still very valid for today. I would note that I was weaned on Benjamin Graham’s “Security Analysis, Principles and Techniques” as an undergraduate at Baruch College. I guess you can say that Graham’s ideas are in my blood. Indeed, just as Graham probed the Standard and Poor’s stock guide, so too did I for many years. Today we have computerized databases.

 The most critical ideas that are useful today include:

·       * A stock certificate is more than a piece of paper; it represents an

      ownership interest in a business.

·      *  Investments should only be undertaken with a quantifiable margin of safety.

·     *   “Mr. Market” who on occasion is manic-depressive allows you to express a view on a stock or a bond every day.

·     *   Despite all of your efforts at security analysis the stock market is loosely efficient making it very difficult to outperform a broad index. Investment success flows from a few very special situations.

·      *  Investors can be characterized as defensive or enterprising, but even for the enterprising investor Graham’s rules are designed to minimize losses through diversification and heeding to margin of safety requirements.

 

As the classic value investor, much of Graham’s work is focused on tangible book value. That metric worked well though the middle of the 20^th Century, but that kept Graham and his acolytes away from growth companies who were powered by intangible capital. Thus, it was hard for Graham to get comfortable with owning many of the growth stocks of his era, but his discipline kept him away from the craziness of the bubbles that occurred in 1961 and in the late 1960’s.  Jason Zweig, the editor of this version discusses at the length the extremes of the late 1990’s dot.com bubble.

 

Graham was fond of public utility shares in the early 1970’s because they traded a low price/earnings and price/book ratios. Unfortunately, he did not foresee the debacle that cost over-runs in nuclear power brought on to this sector. Zweig points this out. Also, Graham really didn’t associate the rise in interest rates in the late 1960’s with the rise in inflation. He characterized common stocks as inflation hedges, which in the long run they are, but that is not necessarily true in the short run as rising inflation propels interest rates higher and price/earnings ratios lower.

 

Then there is a short discussion on Graham’s investment in Government Employees Insurance Co. (GEICO). There his partnership broke his diversification rule by investing 25% of its capital in it for 50% of the company. However, its valuation in terms of earnings and tangible equity was very low. It was his best investment and Warren Buffett, his best-known student, followed him into GEICO and as a result Berkshire Hathaway now owns the entire company.

 

Although the book’s examples are dated, the investing rules outlined here are timeless.

For the full Amazon URL see: Margin of Safety (amazon.com)

Random Thoughts on the Economy and the Stock Market - No. 5

 *-Contrary to what we have been thinking the stock markets as measured by the S&P 500 surged to  its highest level of the year and is just a touch off its August high. The stock market responded to strong employment growth in May and the signals coming out of the Federal Reserve that there will be the first pause in their rate hiking policy that began over a year ago. Further the White House and the Congress agreed to deal over the debt ceiling that postpones that issue well past the 2024 election. For that proviso alone Biden won the debt ceiling stand-off.

*- Obviously the May employment data indicates that my call for the recession starting that month was way off the mark. (See: Shulmaven: Has the Recession Arrived?) Nevertheless, with household employment down by 310,000, compared to a 339,000 increase in nonfarm payrolls, and the the unemployment rate rising to 3.7% all is far from perfect in the labor market.

*-  Little noticed last week was updated guidance from Equity Residential, the owner of 80,000 upscale apartment units,  which indicated that same store rents were up 6% from a year ago. This is hardly the news that the Fed has been looking for. Rents increasing anywhere near that level will make it impossible for the Fed to achieve its 2% inflation target.

*- Treasury bill and bond issuance is about to surge as the government reverses its special measures to avoid breaching the debt ceiling. This action will drain reserves from the system and put upward pressure on interest rates.

*- Net, Net. I would be a seller of the rally.

My Amazon Review of Hal Brands' Ed. "The New Makers of Modern Strategy...."

Thinking Strategically

 

Johns Hopkins professor Hal Brands has updated Peter Paret’s 1986 “Makers of Modern Strategy,” which in turn updated Edward Mead Earle’s 1943 version. It is a very long book consisting of 45 separate essays by different authors that runs 1168 pages. In my opinion this is way too long for the average educated lay reader. Nevertheless, there is much to be learned and I will highlight below a few of the essays that caught my attention.

 

Walter Russell Mead’s discussion of Thucydides is on the mark because it deals with the timeless question that the fear of a rising power (Athens) engenders in an established power (Sparta). I wish he spent more time on Graham Allison’s parallel thoughts on the U.S. vis-à-vis China. (Shulmaven: My Amazon Review of Graham Allison's "Destined for War: Can America and China Escape Thucydides's Trap" ) Matthew Kroenig’s essay on Machiavelli’s realism is spot on. Further he understands that despite Machiavelli’s bad rap, he was a republican at heart seeking to unify Italy. (Shulmaven: My Amazon Review of Philip Bobbitt's "The Garments of Court and Palace: Machiavelli and the World that he Made")

 

I was disappointed in Hew Strachan’s essay on Clausewitz. To be sure he emphasizes that war is the extension of politics by other means, but he is all to brief on friction, the fog of war and the center of gravity of the enemy. He does, however, mentions Col. Harry Summers’ Clausewitzian critique of U.S. military policy in Vietnam.

 

The essay by Charles Edel on John Quincy Adams’ realism hits the mark. Understanding the U.S. was not ready for the global stage, Adams utilizes the implicit support of the British navy to establish the Monroe Doctrine and further avoids direct U.S. involvement in the Latin American and Greek revolutions. At the time the U.S. could rightly only offer moral support.

 

I didn’t realize how influential Alfred Taylor Mahan’s treatise in sea power until I read John Maurer’s essay. Mahan’s influence extended well beyond the United States to Germany and Japan with global consequences. Robert Kagan’s essay on Woodrow Wilson casts him, not Theodore Roosevelt, as the architect of American global strategy for the 20^th Century. Wilson comes off far more realistic than I expected as he protected U.S. interests at Versailles.

 

Nobel Laureate Thomas Schelling’s theories of nuclear deterrence and flexible response are examined by Eric Edelman. Schelling’s theories were in contradiction to the Eisenhower Administration’s massive retaliation response to potential Soviet aggression. One of the problems, as Edelman notes, is that sometimes the message you want to send is misinterpreted by the enemy, which is what occurred during the Cuban missile crisis. The Russians thought the embargo was a far bigger deal than how the Kennedy Administration viewed it.

 

Mark Moyar’s essay on U.S. strategy in Vietnam accuses the Johnson Administration of refusing to listen to its military advisors who wanted to go all-in at the start of the war. Simply put, gradual escalation failed. However, it is not clear that Johnson would have had the political support for what his advisors advocated. Nevertheless, this debate echoes to this day with the Biden policy with respect to Ukraine. Biden has been a gradualist, but ultimately, he is doing far more than what he thought practical at the start of the war.

 

I am glad that Dmitry Adamsky has given credit to Andrew Marshall, the long-time Pentagon guru of the net assessment project. If any one person has been the architect of U.S. military strategy in a networked age, it is Marshall. (Shulmaven: My Amazon Review of Andrew Krepinevich's and Barry Watts' "The Last Warrior: Andrew Marshall and the Shaping of Modern American Defense Strategy")

 

The book ends with a summation essay by Yale’s John Lewis Gaddis. It is a well thought out summary, but where he errs is that he gives too much credit to Franklin Roosevelt’s recognition of the Soviet Union as a strategic decision that would play out in World War II. To me, it is an ex-post rationalization where Roosevelt’s motivation had more to do with the hope of near-term trade deals.

 

I know I have only scratched the surface of Brands’ book, but if the reader puts in the effort there is much to be learned here.

For the full Amazon URL see: Thinking Strategically (amazon.com)

My Amazon Review of Alexander Watson's "Ring of Steel"

 The Central Powers’ Long Slog in the East

 

University of London historian Alexander Watson has written a history of World War I through the eyes of the defeated Central Powers, Germany and Austria-Hungary. It is a long slog, 608 pages in the paperback edition, but the reader will get a real sense of the tribulations their armies and people suffered during the war. A war caused largely by Austria-Hungary and Germany with a big assist from Russia.

 

Most of the focus of the book is on the bloodlands of the East and the fear Russia’s invasion of both countries in 1914 engendered in Vienna and Berlin. At the outset of the war Austria lost a good part of the granaries of Galicia which set the stage for the mass starvation that was to come. Later the British navy would induce mass starvation in Germany and of a sudden the Central Powers were surrounded by a ring of steel.

 

If the Central Powers did not have imperialist war aims in 1914, the Russian onslaught and the stalemate in the west, both Germany and Austria sought food security in the East and Germany longed for the French iron mines. And it was those goals that maintained the necessary popular consent for most of the war.

 

Germany’s hope for a swift victory died in the Marne Valley and Austria simply was not up to fighting a major war. Its leadership went from failure to failure. Its polyglot empire couldn’t stand the strains of modern war. Meanwhile all of the participants in the East turned on their Jewish populations with wave after wave of pogroms. Germany’s problem was that it had Austria for an ally.

 

Watson as many others have noted the fateful decision of Germany to start unrestricted submarine warfare in 1917 sealed its fate by bringing the United States into the war. The pressure from the populace and the military was too great, but had they waited less than a year the Bolshevik Revolution of November 1917 could opened the way to a German victory in 1918 without the United States in the war. When defeat came it came, it came not from a “stab in the back,” but rather from a collapse in the morale in the German Army. 

 

Watson has offered up a strong, but way too detailed history of the Central Powers at war. It would have benefitted from a little bit less detail and more coverage on the role of Ottoman Turkey in the war.

For the full amazon URL see: The Central Powers' Long Slog in the East (amazon.com)

Has the Recession Arrived?

Has the long forecasted recession arrived? My answer is YES. Here is why:

* The banking system is crippled with huge mark-to-market losses on securities held to maturity. (See: Shulmaven: Winter Comes to the Bank Stocks) Further the loan losses associated with bad commercial real loans have yet to be recognized. Hence lending is being curtailed across a broad front of borrowers.

* New claims for unemployment insurance reached an 18 month high last week at 264,000. The labor market is nowhere near as strong as it was.

* The price of copper made a new low for the year at $3.72/pound down 14% from its January high. This is the metal with a Ph.D. in economics, although as my friend John Lipsky always reminds me it is from the Universidad de Cattolica de Chile. 

* The stock market has gone nowhere over the past two years with nominal stock prices down 1% and real stock prices down 14%. Hence the consumption fuel coming from the wealth effect has evaporated.

* First quarter consumption was flattered by an 8% increase in Social Security payments, obviously not to be repeated for the balance of the year.

* Although real GDP is likely to to be up in the second quarter because of a modest swing in inventories, real final sales will decline and that will set the stage for a decline in both final sales and the overall GDP in the third quarter.

* Because inflation will remain sticky, the Fed will need a significant move up in the unemployment rate before pivoting to a lower interest rate regime. Thus the Fed policy would allow for a mild contraction in the economy.

The Video Link to a Book Talk by Daniel Gordis on his "Impossible Takes Longer...."

Presented below is the video link to a book talk by Daniel Gordis on his "Impossible Takes Longer...." where he discusses Israel@75. Trust me, it is well worth watching. I previously reviewed the book here at:

Shulmaven: My Amazon Review of Daniel Gordis' "Impossible Takes Longer: 75 Years after....... "

The video link presented by the Jewish Learning Channel is here: Daniel Gordis -- Impossible Takes Longer -- Israel at 75 - YouTube

My Review* of Jonathan Wilson's "The Red Balcony"

An Assassination on the Beach

 

In the evening June 16, 1933, Haim Arlosoroff, the political director of the Jewish Agency, was brutally murdered while taking a walk with his wife on the Tel Aviv beach. Arlosoroff had just returned from Germany where he negotiated the Transfer Agreement which enabled 50,000 Jews over the next three years to leave Germany conditioned on them turning over their resources to be used to pay for German exports to Palestine. To this day the mystery of who killed Arlosoroff is unsolved, and it is at the core of Jonathan Wilson’s “The Red Balcony” which takes us to the streets of Jerusalem, Tel Aviv and Safed, cities I know well.

 

Wilson’s protagonist is Ivor Castle a young Jewish graduate of Oxford University who is hired to assist the lead defense counsel Phineas Baron. Castle’s first job is to secure the witness testimony of Tsiona Kerem, a very Bohemian artist who he instantly falls in lust and then in love with her, some of which is played out on her red balcony. Kerem is far more involved than first we are first let in on.

 

Castle is helping to prepare the defense for the two accused killers, Aaron Stavsky and Ze’ev Rosenblatt, both of whom are associated with Ze’ev Jabotinsky’s Revisionist Zionist grouping.  Jabotinsky’s group opposed the Transfer deal because it meant doing business with the Nazi devils and it worked to undo the boycott of German goods. Both defendants are ultimately acquitted and to this day the crime has yet to be solved with other potential assailants being hard-lined Arabs who opposed Arlosoroff’s peacemaking and the Nazis because of Arsololoff’s alleged affair with Goebbels’ part-Jewish wife.

 

There are two other interesting characters in the book. A Charles Gross, an Oxford contemporary of Castle’s who is very close to Revisionist Zionism. We also have Gross’ cousin, the Baltimore socialite whose father is very much involved in helping to fund the Transfer Agreement.

 

One of the things I really lied about the book is Wilson’s description of the Palestine Mandate in the hiatus between the Arab riots of 1929 and the Great Arab Revolt of 1936. You get a very real sense of what the state in the making was like in the guise of a crime thriller.

*- Amazon has yet to post this review. Amazon just posted at this URL An Assassination on the Beach (amazon.com)