better than deep breathing exercises when the market goes crazy is an exchange like this one between Buffett and a PBS interviewer.....http://www.cnbc.com/id/28800287

Snake Eats Hippo

Moyers interviews Soros about the crisis and we get some real answers.

Bush on the economy: "Who are you gonna believe, me or your lying eyes?"

Charlie Rose interviews WB re. current crisis. Well worth watching for its explanation of what's going on and what's likely to come.

We’ve seen a lot of houses now. There was the house with the goat out back--we stood around in 110 degree heat looking at all the weird crap that was piled up outside the door in which wasps were nesting while the listing agent hunted for a way inside. It used to be a feed store. The ceilings were all about 5 feet high.

The house where someone had bashed in the front wall to make a couple of picture windows. Strange things had happened there—pieces of abandoned art, odd cabinetry that looked like some high schooler’s project for shop, and then, in the back, a perfect little room with a beehive fireplace like the maid’s quarters in a Mexican hacienda. The tiny kitchen was dominated by a 1950s six-burner, two-oven stove, very rare. Restored, worth maybe ten grand. The guest house could’ve been a rustic cabin in a Raymond Chandler novel. Something had died outside the front door and hadn’t been properly buried.

Most recently, we looked at a house where the owner was having a yard sale in absentia, leaving signs atop piles of glass bricks and old clothes. A bowflex and one of those cross-country skiing machines didn’t seem to be for sale. Mr. Carruthers commented that cross-country skiing machines are stupid anyway. We put an offer in on that one. We won’t be the new owners of the Crazy Tenant House, as we found out earlier this week, though the pot plants may still be available…

Roy lurches up off the bed and grinds some coffee—it’s Nicaraguan cup of excellence that he roasted himself, filling the house with a peculiarly dense smoke that required us to walk around waving sheets in an attempt to clear the air. He fires up the James Bond espresso maker and pulls a shot.

“Wow, massive crema!” he exclaims, not for the first time. Knocking back his espresso, he wonders if real estate is really the right investment right now. As our nation's pole star Sarah Palin has recently asserted, we might be heading for another Great Depression. Should we start a café instead? Leave the country? Berkshire Hathaway has backed away from insuring bank deposits, a subtle move that is scarier than all the headlines put together. Even so, as Buffett suggests, “be greedy when others are fearful and fearful when others are greedy.” Maybe now’s the time to take a good long look at the stock market.

Roy Reads: When Genius Failed

“I had some dreams, they were clouds in my coffee…”

When Genius Failed: The Rise and Fall of Long-Term Capital Management
Roger Lowenstein (New York: Random House, 2000)

A while back I was watching a pithy speech on YouTube given by Warren Buffett to a group of MBA students at University of Florida. Among its many gems was a brief description of the hedge fund Long-Term Capital Management and the decisions that led to their downfall in the late 90’s. Basically, in order “to make money they didn’t have and didn’t need they risked what they did have and did need.” OK, so what if I want to make money I don’t have and do need? Is the inverse true? Obverse? I needed to know more. So when I read an article by Roger Lowenstein in the New York Times and he seemed to know what he was talking about, I thought his book about LTCM might be worth checking out—of the library of course. What’s not to like about free?

Consider for a moment the average financial professional. We may ask: Has he


or she


won a Nobel prize? Is this person turning away new money because she has too much to invest already? Does he even own a clean suit and have a firm handshake? No on all accounts? Well, maybe that’s ok. Read on.

Now, I grant you that the idea of turning over a fortune to highly intelligent professionals so that I can roam the earth without a care in the world is appealing. And it may just be sour grapes (I don’t yet have a fortune to turn over) that makes me so skeptical of money managers, but the more I heard about LTCM, the more my skepticism grew.

LTCM started life as a great story that went something like this: “We’re smart, we have a plan and we know what we’re doing—trust us.” They were quite convincing because a) they were smart—the group consisted of two Nobel prize winners, professors from Harvard and MIT, a central banker and several industry heavyweights; b) they had a plan, literally a Nobel-prize-winning plan; and c) they had ample past success, not to mention rolodexes filled with the names of friends and colleagues at the highest levels of finance. Hell, yes, you could trust them. Where’s my checkbook? Investors fell all over themselves to get onboard. And these weren’t mom and pop investors—only the savviest insiders and richest institutions and individuals were allowed in. Banks trusted them too. There was such fierce competition to loan the group money that their borrowing costs were negligible. This was a good thing, because the bets they were making paid pennies on the dollar. It was as if they were playing dollar slot machines and expecting $1.03 payoffs. Luckily for them, they could use a friendly bank’s dollar and keep the pennies for themselves—and do it millions of times per day. Brings to mind the Saturday Night Live skit about being in the business of making change. “Some ask us how we can make money doing this. The answer: volume.”

LTCM made so much money in its first few years of business that it had to force its investors to take back billions of dollars so that the owners’ shares wouldn’t be diluted. Talk about a good business to be in. The partners in LTCM (and most hedge funds operating today) collected 2% of the money people had given them to invest and kept 25% of the profits every year. That’s what I call a plan.

However, the plan the group used to invest everyone’s money was a bit different. It relied on the belief that financial markets were becoming big enough and efficient enough that they could be described mathematically. With these mathematical models, the group would make predictions. Not predictions in the sense that one could know when and by how much prices would change—even LTCM thought that couldn’t be done consistently—but that prices would change within certain limits. It was like the mixing of cream into coffee. At any given point in the cup, things may look chaotic, but the overall change from black and white to beige can be modeled and explained. LTCM’s model and explanation, taken from physics and applied to markets, called the Black-Scholes model was just getting popular in the ‘90s, and it actually is a good description of market behavior most of the time. That’s how LTCM was able to quadruple its money in 4 years with basically no deviation from its expectations. The problem, as it usually does, came when the theory didn’t hold true. The markets ceased acting like cream in coffee and more like a panicked crowd. The cream jumped out of the coffee, and LTCM went belly up within months.

One take home lesson: If Long-Term Capital Management wasn’t smart enough to predict short-term market behavior, nobody is smart enough to predict short-term market behavior. A better plan doesn’t require such predictions. So does that mean our average money manager might be worth hiring after all? I’ll get back to you on that one.