One thing we can say right off the bat is that, having attended both, the Ira Sohn Investment Conference is a better event: shorter in length, better attended and with better speakers, more focused and, we dare say, with more committed speakers.

David Einhorn: Short Green Mountain Coffee Roasters (Nasdaq: GMCR). Both Reuters and Bloomberg‘s stories are accurate enough accounts. That said, they don’t fully capture what appears to be another case of relentless research by Mr. Einhorn. Again, he may be right or wrong, but it’s hard to argue that his team hasn’t worked hard at this. This reminds us of Einhorn’s must-read book Fooling Some of The People All of The Time. And the Einhorn effect remains intact: by the time his talk was over, the stock was dropping 13%.

Jim Chanos: Global Value Traps. He presented the many features of a “value trap”-kind of investment, some of which can occur simultaneously. Then he distilled five value traps he’s focused on and named names. One of them? Brazil’s Vale, one of the world’s largest mining companies. While he’s always fun to watch, we’d prefer one-two main ideas and derive his investment process from them. If it sounds like David Einhorn’s presentations, it’s because we prefer the deep-research presentations.

Vladimir Jelisavcic, Long Acre: DryShips, Inc. (Nasdaq: DRYS) – long the convertible bonds. This was a tough one to watch and a reminder of the need for synthesis/”packaging” skills. A bad presentation detracts from the actual message and influences our perceptions about the speaker. While it’s obviously important to keep this in mind in order to avoid being “charmed” by an outstanding speaker, it’s also important for the speaker to present well and avoid an undeserved bad impression. And lo and behold, by the time Mr. Jelisavcic got to the details it was clear that he had done the work on the convertibles – assuming he’s correct about the difficulty of increasing capacity in the UDW ships/rigs (UDW=ultra deep water).

In the Q&A question, Vladimir discussed his fund’s philosophy/goals: to attain equity-like returns via distressed debt investing. His point is that if the debt is distressed, there’s a high probability that the stock is also distressed, in which case the debt investment gets you “closer to the assets”. That is, you buy something with potential price upside (from the bond price and conversion premium) but with higher seniority. The problem is that it’s always an investment research process that’s heavy in legal advice, consulting and so on.

Timothy E. Hartch, Brown Brothers Harriman: Long Dentsply (Nasdaq: XRAY). Re-reading the notes it’s clear the presentation was heavy in data, but not much conviction to be found here. He started by saying that Dentsply is “the one company” in his portfolio that he’d “invest and leave the money there for 20 years”. He called it the best business he knows. While we know and like the company, there are plenty of other businesses we’d prefer to that one. And this observation – that preferences/weightings/risk appetites/experiences/mental models of Investor A will differ from those of Investor B – ties up very well with the interesting story he told about his first assignment at Brown Brothers Harriman (henceforth BBH for carpal tunnel syndrome-prevention reasons):

Mr. Hartch began as a Corporate Finance analyst, and the first assignment was to help a client sell his media company. After valuing the company and sending the pitch book to four interested strategic buyers (all media companies as well), it was time to hear their bids. Companies 1 and 2 had the same valuation: US$ 10-15mm. Company 3 had US$ 25-30mm. He was still concerned because he told his client it could fetch US$ 40-45mm. Then Company 4 siad it’d buy the company for US$ 90 million… The valuable lesson (and best part of his presentation): “Same company, same data, same day, yet very wide range of values. Valuation in an estimate. Be humble about your own.”

There was also an interesting long case on “micro-cap” Energy Solutions, but still very little meat in our notes.

The last speaker was Alexander Roepers of Atlantic Investment Management. He was very generalist, and we were hoping he would spell out his case for McGraw-Hill Companies, an activist case. So we’ll leave you with his first sentence:

“I’m glad none of my ideas were trashed by either Jim Chanos or David Einhorn!”

We posted some interesting links – in Portuguese – about Mr. Ruy Mendes Gonçalves at Buysiders.com.BR.

Julian Assange – founder, Wikileaks

- Brazilians are the largest supporters of Wikileaks in number (not $$). That was surprising.

- Whatever your degree of belief in their message, it isn’t hard to figure out that while most of the Western world is supposed to be under the rule of law, in certain instances these “checks and balances” in the system can fail. The only way to combat these flaws is through transparency.

- In their efforts to spread the information it gathers, obviously the Internet is paramount – but without mainstream media coverage Wikileaks has no support and the message doesn’t reach its potential audience. So while there’s constant tension between Wikileaks’ traditional media and its incentive/ownership structures, they need it more than the main media need them. Even so, he mentioned a 2008 lawsuit initiated by Swiss wealth manager Julius Baer after a damaging leak, and Wikileaks only survived it financially because CBS News, the New York Times and 23 other organizations and universities sent or offered to send their own lawyers to Wikileaks’ rescue. Eventually, they won.

- Very interestingly, he says that before the people’s right to know something comes the rights of the whistleblowers and sources. If you think about it, that’s key to their “business model”: if you don’t protect your sources, and in some cases “hiding their identities” means literally “ensuring their survival”, no source will ever come to you twice and new sources won’t do it either.

- He says that the supply of information is not the problem: they’re getting a lot of good material. The challenge is to publish relentlessly and “never un-publish”, that is, never back down despite the pressures. And never fail in terms of infrastructure either (again, it has to be reasonably sure it can publish and sustain something “on air” so that sources remain motivated).

- Thought-provoking: “never be frightened of statements by society or governments without testing them. Always advance, move forward. All it takes to keep people down is fear: true power is not necessary to intimidate a society. But if you keep at it and reveal their governments’ weakness, people start to believe. That’s why most revolutions start in public squares: seeing like-minded people angry or ready to act is empowering and goes against what they might have read or heard from official sources”.

- Another interesting “business model” issue: there’s a certain level of “churn” with their partners. He says some partners are “compromised” but others are “contaminated”, that is, they lose the incentives to collaborate with Wikileaks.

- Censorship in the West differs from the “cartoonish” (his words) definition of police invading newsrooms. The idea is to “drown out the truth with lies, repeating them over and over until it’s relatively impossible for common citizens to discern signal from noise.

- Thought-provoking again: “Governments don’t have rights, they have responsibilities. The most important of them is the responsibility to ensure the rights of individuals. Sometimes governments feel that some censorship, or the censorship of certain issues, actually is a way to ensure these rights. Wikileaks is not against secrecy, in fact it depends on secrecy to protect its sources and itself, and it recognizes the need some agencies feel to hold some things back. Individuals, however, shouldn’t care and shouldn’t be blocked from anything if they choose to know it.”

- Finally, when asked how do they tell truth from lies in Wikipedia, Mr. Assange had an answer that Richard Feynman would be proud of: “We have to go back to one word: Epistemology. How do we know what we know. I’ve studied this field a lot. The basic idea is that we cannot know what is TRUE, but we may figure out what is NOT true. So with sufficient lies or false statements, what is left has some probability of being true. Therefore exposing lies and false statements is VITAL.”

“Torture numbers, and they’ll confess to anything.” – Gregg Easterbrook

“He uses statistics as a drunken man uses lamp-posts … for support rather than illumination.” — Andrew Lang

“There’s no sense in being precise when you don’t even know what you’re talking about.” – John Von Neumann

“For every complex problem there is an answer that is clear, simple, and wrong.” – H. L. Mencken

“Not everything that can be counted counts, and not everything that counts can be counted.” – Albert Einstein (attributed)

One highlight is the interview with Dr. Chris Gibson-Smith (embedded in this post), Chairman of the London Stock Exchange. We highlight in this post several excerpts worth considering – it’s intended for business in general, but can also be framed for the specifics of investment management.

Here’s the 7:41 video (highlights below):

Highlights:

- His life history is interesting: the balance of science and business shifting over the years, and it clearly influenced the highlight below:

- “I’ve worked in half a dozen industries in depth, and I’ve found the same thing wherever I go: every sector has its own technical knowledge, and you have to master that knowledge, otherwise you can’t be in the sector. But above that, the thing that is true particularly as you rise to levels of leadership and senior management, it’s the ability to think and act. The thinking creates the context, the framework, the vision, the intention; but it has no meaning unless you act. But the action has no focus unless you’ve thought. And it’s this balance between deep thought and precise action that produces effective results.“ — We’d add that this can be true as long as incentives are aligned, and the environment (including the teamwork) is positive and so on – but he mentioned the teamwork part below.

- He then talked about how he was kind of surprised that he was getting successful in business, and continuously so, and the surprise was due to the fact that he was so involved in the day-to-day. So he stepped back to wonder why it happened, and his takeaway is very interesting. According to him, he found in this exercise that one is successful or not “because of the quality of the people you worked with and the way you worked with them. Overwhelmingly it was the way in which you interacted with people that was at the center of one’s ability to contribute. And unquestionably I learned that in business – it’s [also] true in life – and it remains the most important thing about doing business for me.”

- Finally, a very interesting take on his duties as Chairman and leader, which show his specific skill set or strong points (and it makes sense given his “scientific method” past). It may not work for everyone, but it’s his way: I’m emphatically clear on my duties as leader. So I carry an un-assignable responsibility for the future of my organizations. It is not dilutable, but it’s completely shareable. So I think a great deal and then I involve people in the organization and they solve all the questions. My real task is to figure out the questions and then give it to other people to work out the answers, and I think I do that in a repeated pattern wherever I go.”

We posted an interview with Mr. Klarman back in September, also worth the read.

First of all, it’s humbling that such a commonsensical notion about the brain has been at least in dispute for almost 15 years, while we still get everyday stories of “right side vs. left side”. Good reminder to keep one’s preconceived notions in check – including the assumption that the current line of thinking is definitive.

The author then goes into the “modern” theory and highlights some alternative approaches to try to stimulate insights, the “Aha!” moments. Here are a few quotes that caught our attention:

- “The shelves of the brain are stocked with what you’ve seen or heard or read about what others have done before. This process takes place naturally in every human brain, but active study can accelerate and improve it (…)” – indeed. Compare it to two quotes by Charlie Munger: “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero.” and “Spend each day trying to be a little wiser than you were when you woke up.”

This is from our “Why we write” page on Buysiders.com:

“At IP we seek to fight our structural cognitive limitations acting with discipline and dedication in 4 fronts: (…) 1) Investing our attention in the acquisition of “frameworks”, “mental models”, “vocabularies” and information of several disciplines, industries, companies, geographies, business models, vehicles and investment structures. These resources form a tacit knowledge mosaic that: a) creates context(s) for us to understand and organize the innumerable stimuli we receive, helping distinguish what is relevant and what is not; b) functions as a repository of information with potential to be used in the future; c) encourages our creativity, providing us with perspectives and starting points different from the “average view” for everything we do.”

Another quote from the article:

- “The presence of mind Clausewitz describes is akin to the calm state that precedes a flash of insight, (…) when your brain is relaxed and wandering, instead of focused on a particular problem.” – Again we turn to Charlie Munger, who has said: “We both (Charlie Munger and Warren Buffett) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think.”

Finally, the author describes GE in the 1990′s. Then-CEO Jack Welch and his Chief Learning Officer Steve Kerr had a method for problem-solving that the author considers very clever. Describing the method he calls “the GE matrix” he says:

- “(…) Then ask the most important question you can ever ask to solve any problem of any kind: Has anyone else in the world ever made progress on any piece of this puzzle?” – Or, as we’ve written in a 2009 post: “(…) But we can greatly improve where and how we get our “building blocks” by looking abroad. We joke that it’s the “crystal ball that works” – we wish it was that good, but we find more and more over the years that we gain valuable insights. (…) In some cases, NOT doing it may blind you to risk factors not previously seen.”

We’d like to add another dimension to the first and third quotes we’ve highlighted above: networking. Part of the active, relentless effort to acquire mental models, knowledge, facts and other building blocks involves getting to know the right people and foster these relationships. As we’ve written (again…) in the “Why We Write” page:

“2) Building up and developing a local, national and international “intelligence network”. According to our experience, it is not very “wise” to leave out of consideration, in a strict process of evaluation of investments, the input of people who know much more than you about some key points of your analysis. (…) There are also thousands of formal and informal specialists spread throughout Brazil and worldwide. They are former company administrators, regulators, shareholders, investors, consultants. They are very useful on several manners: as independent sources of information on companies, people background checks (administrators, shareholders), as ‘devil advocates’, for specific aspects of an investment thesis, and are also useful to make us get quickly up to speed with respect to relevant themes that take place in countries different from ours.”

Other references at Buysiders.com:

- Creative problem-solving – Dec. 20th, 2010.

- Multidiscplinary approach and communication – Feb. 17th, 2010.

Part 1 of 10 (9:52)

Part 2 of 10 (10:00)

Part 3 of 10 (9:07)

Part 4 of 10 (6:33)

Part 5 of 10 (8:32)

Part 6 of 10 (8:29)

Part 7 of 10 (9:34)

Part 8 of 10 (8:48)

Part 9 of 10 (6:28)

Part 10 of 10 (7:52)

A recent report had us thinking about an issue that we’ve been discussing repeatedly in our reports: fiscal accounts in Brazil have been deteriorating. It’s unusual for this blog to mention sell-side research, but a piece by Santander’s Alexandre Schwartsman called “Brazil: The Naked Truth” (PDF, Nov. 22nd, 2010) is very well written and unfortunately recalls Mr. Lincoln’s quote. Mr. Schwartsman posted the main arguments (in portuguese) in his blog, which is a great source.

A post on Seth Godin’s blog over Mother’s Day weekend had one sentence that “clicked” right away: “The best ideas come out of the corner of our eye, the edge of our consciousness, in a flash. They are the result of misdirection and random collisions (…)”

Nicholas Nassim Taleb had this to say about going to parties: “Go to parties. You can’t even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.”

From a recent NYT article on the American University in Cairo and how it challenges students to “unlearn” in the first year: “Who am I? What does it mean to be human? These are the kinds of questions posed to undergraduate students entering this 90-year-old university during what the president, David D. Arnold, called a first year of “disorientation.” During disorientation, the students — 85 percent of them Egyptians — are taught to learn in ways quite at odds with the traditional method of teaching in this country, where instructors lecture, students memorize and tests are exercises in regurgitation.”

Charlie Munger has always talked about this: “Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.”

We’re sure we could come up with more “pieces” to this puzzle, and so could you, but we’ll let Mr. Munger himself sum it up perfectly for us:

“Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.”

There are many ways to “be prepared”, so here’s one: Build your own mental models with discipline and drive, sourcing as diversely as possible but always focusing on what’s really relevant, collaborating with a team of bright people both inside and outside your firm – better yet, people brighter than you.

It’s hard, patient, disciplined and long-term work, but it’s well worth it.