The big point behind both stories: the protectionism that drives the huge taxation making imports so expensive in Brazil as to justify, in some cases, the airfare and hotel expenses.

Here’s the 3-minute video:

Bill Miller himself once said: “This is a brutal business, success equals survival. If you have survived, you will have succeeded”. We have said it a little differently since 1988: to finish first, you must first finish.

Mr. Miller, famous for his 15-year streak of beating the S&P 500, has announced that he will step down as co-manager of the Legg Mason Value Trust in April 2012 (he will remain at the firm as Chairman). Investors of a certain age have certainly read a lot about this fund. Is Mr. Miller’s rise and subsequent fall a matter of genius becoming overconfidence or simple probability theory playing out as per Taleb? Not knowing the inside workings of Legg Mason Capital Management, no one can really claim to know the answer. To help us think about it, we collect several links inside.

The summary: Bill Miller took the reins of the Value Trust on April 16th 1982, and in the time since then he has “produced an annual return of 11.25%, according to Lipper“. The S&P 500 in the same period returned 8.3% p.a., not including dividend reinvestment. But in the 15-year period from 1991 to 2005 the fund beat the S&P 500 every year, which made the fund’s (and Bill Miller’s) fame global. Fortune Magazine called him “the greatest money manager of our time” in November 2006.

Well, ever since then it’s been downhill and the fund is now down a compounded 9.7% per year. The list of “mistakes” is all over the web, and it included Eastman Kodak, the mother of all case studies on cultural chains that bound a company to its past. As early as 2008 the press, so happy to boost him before, was calling for his head. Just remember that it’s always hard to call if it is a research, sizing, timing mistake or simply a matter of probabilities playing out unfavorably despite a good process.

Either way, even though the company did beat the S&P 500 over 15 years starting on Jan. 1st 1991, the returns are actually slightly lower than the S&P 500 from that same date until Bill Miller’s announcement on Nov. 16th (7.4% p.a. vs. 7.7% for the S&P).

Is this a case of people/ press deifying a man and a team because they were measuring “performance” as simply “outcomes” and forgetting about “processes”? In other words, was Bill Miller an “articulate coin flipper”? Here’s the odd part: Bill Miller and his company have always been concerned about investment as a multi-disciplinary, psychologically-driven, incentives-based field. He has studied widely and fostered innovative thinking in the industry – he has even hired Michael Mauboussin to be a “chief instigator” of sorts (official title: Chief Investment Strategist). Legg Mason, Mr. Miller, Mr. Mauboussin and others have been active members (Mr. Miller was Chairman of the Board and is Chairman Emeritus) and supporters of the Sante Fe Institute, a research powerhouse focused on “complexity research expanding the boundaries of science”. That doesn’t mean their processes were above questioning, nor that they couldn’t fall prey to some of the traps of success, but there’s at least the appearance that they had it covered at Legg Mason.

Overconfidence? Here’s an excerpt from Bill Miller’s letter to Value Trust shareholders in January of 2006, only days after completing the 15th straight year beating the S&P: “I thought it might be helpful, in addition to saying how much we appreciate your confidence in allowing us to invest your savings, to say a little about the principles…” (…) “You are probably aware that the Legg Mason Value Trust has outperformed the S&P 500 index for each of the past 15 calendar years. That may be the reason you decided to purchase the fund. If so, we are flattered, but believe you are setting yourself up for disappointment.” – Sure, it could be just lip service. But for over 12 years we have been reading his shareholder letters and he seems to really be the person who gave this interview to Money Magazine in 2007.

Could it be the old problem of size trumping performance? At its peak in 2007, Value Trust ballooned up to $27 billion in assets (when Mr. Miller resigned it was down to $2.8 billion). Again, not necessarily since there is evidence of long-term market outperformance with even larger assets (e.g. Berkshire Hathaway).

Mr. Miller has been rumored to be retiring and had been complaining about two things: “The huge rise of exchange-traded funds, which allowed people to buy baskets of things which caused correlations to rise, and of course the rise in algorithmic trading.” And this Financial Times LEX article on November 18th checks that out and says yes, correlation is going steadily up. But this is also certainly not enough.

Finally, it is worth noting that Mr. Miller is another one in a list of recent departures: George Soros and Stanley Druckenmiller have also recently quit. And in a big story in August of this year, the Financial Times noted that “several of the industry’s most prominent names have had a disastrous year so far.” That list in 2011 also includes John Paulson (the best of all active money managers in the five years that ended on December 31st, 2010) and Bruce Berkowitz of Fairholme.

There are no easy lessons here, no fingers to point. Remarkable, yet just another occasion to provoke thought, rekindle humility and remember once more that to finish first, first you must finish.

China

The real risks to China’s financial system – FT.com – Two articles supposedly debate the IMF report, but it turns out their opinions aren’t that much divergent. We’ve read calls for opening up the system, and we remind the readers that when the incentive systems of enough players are aligned towards a given direction – in this case, growth, then whether it’s centralized or open doesn’t matter as much. One such example was the US housing boom and subsequent bust: oversimplifying a bit, one can argue that all players were aligned towards growth: home owners, mortgage originators/ packagers/ distributors, banks, investors, credit rating agencies etc. – and, on top of them all, the government and its agencies. The fact that the system was open, competitive and so on didn’t help much. In China, the incentives to grow are still strong and the Central government is yet to pull on the reins strongly enough. It’s not necessarily true that an open system would be better incentivized to slow down.

Europe

Banks face funding stress – WSJ.com – European banks need funding, most of it nowadays comes from the ECB due to higher perceived risk. So banks needing collateral accepted by the ECB enter strange swaps with funds and investment banks to get such “risk-free” assets at a discount to the, well, not-collateral-level assets they’re swapping with the other players. Is this spreading the risk or creating even more connections where there shouldn’t be many?

UniCredit bombshell shouldn’t be the last one – Bloomberg – UniCredit, one of Italy’s largest lenders, has recognized 10.7 billion euros in asset writedowns in its latest report. Even so it’s still trading at 0.29x book value, and that book value is propped up by “useless” assets such as deferred taxes (good luck turning a profit to use this asset) and goodwill (good luck trading goodwill for cash). Other european banks trade at P/B multiples that suggest their credibility is also way down. However, the author argues the problem could be global and that, if banks start getting as candid as UniCredit, things could get rather unpredictable.

USA

Fitch’s warning spooks investors – WSJ.com — AND — US Banks face contagion risk from European debt – Bloomberg – Credit rating agency Fitch has issued a report (for subscribers only) on the “serious risk” that US banks may face if the situation in Europe deteriorates much further. As in France being at risk, for instance. While again it’s a case of “not much new information”, the fact that they chose to go on record – even though they didn’t change the ratings of any of the US banks mentioned – has spooked investors (US banks down by 3-4% as we write, with the notable yet unsurprising exception of Wells Fargo – still down by 1%).

Why not break up Citigroup? – NYT’s Economix blog – Simon Johnson, former IMF chief economist, links to the Dallas FED president’s speech on “too big to fail” banks and agrees with him that such institutions should be broken down into smaller pieces. He suggests starting with Citigroup.

‘Aloha’ to a new fix-it job – WSJ.com – coincidentally, the WSJ.com has a profile of Michael O’Neill, the new Chairman of Citibank N.A. (not Citigroup, “just” the bank – i.e. 70% of Citigroup’s assets). Certainly an impressive profile, but we’re reminded of Warren Buffett’s axiom: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

Global

Finance job losses near 200,00 as BNP, Citigroup trim employees – Bloomberg – Well, partially playing to Mr. Johnson’s wishes above, the banks are reducing their size – does involuntary reduction count?

Huge, sprawling article on Business Insider about Groupon since the early beginnings. It’s telling when an article about the big article is 3 pages long.

Normally we would recommend reading the summary for conciseness – and because the day only has 24h – but the big article is a keeper. It’s even more useful for those running, considering, or investing in start-ups. They got almost all of it right, except for the culture change part. It is more important, and far more disruptive, than they make it seem. That’s the article’s usefulness for the rest of us.