2. Yes, let’s be honest about private equity.

3. Are you Google’s customer, or its product?

4. Instant classic: a parody of our nation’s finances.

5. The more ya know, the less ya understand.

6. Belgian beer uber alles.

7. The best letter to a lawyer, ever.

Not sure what term makes me cringe more…”political intelligence” or “honest graft.”

Why would someone coming out of military service have a harder time finding a job? Think about the demographics of a young soldier. Most are men, and unemployment is worse now for men: 9.5 percent in October vs. 8.5 percent for women. Younger vets are coming right out of high school; the job market punishes those with less education. Many vets come from and return to rural and rust-belt areas that are struggling. And the cut-throat competition for jobs has been hardest on those out of work the longest; fair or not, eight years in the Army is viewed by some employers as eight years without private-sector skills and experience.

I think there are at least three points worth making here.

1 – For young people, the military is the single best “jobs program” this country ever developed.

2 – You can’t train integrity. Or as Warren Buffett once said:

“…in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you.”

3 – Once upon a time a few brave civilians took on some risk by hiring this particular veteran – thanks to a considerable amount of behind-the-scenes help from my own veteran buddies. I’d like to think it was, as much as I hate this phrase, “win-win.” Those jobs changed my life immensely, and I helped make those companies better, too.

And for anyone currently in the service who might be reading this, here are a few of my own observations about getting out and going to work in the private sector a dozen years ago.

A – Most of corporate America won’t get you. At least, not at first. That point in the quote above about veterans not being hired because they’re viewed as not having any relevant experience is dead-on. The thing is, though, is that while that may be true, after a few weeks at a new job, it also becomes completely irrelevant. And that is because…

B – There is a critical shortage of people in the business world who are, quite simply, unable to get things done. You will be amazed.

C – Concepts like accountability, honor and integrity are completely absent from many workplace cultures. You can’t swing a dead cat in the financial services industry, for instance, without hitting someone who believes those concepts are outdated, quaint, or cliched. Do not go to work for one of those people. Ever. No matter what.

D – When they ask you in the interview, your strengths are your work ethic, your belief that systems not people are the stars, your experience working on high-performing teams, and your ability to self-motivate. Your weaknesses are that you don’t know how to dress and you like your hair short. That hair thing is an easy fix, but lordy, please take that label off the sleeve of your suit jacket. And just know that they’re probably going to initially assume you’re an uncreative, rigid drone who loves tobacco, swearing and blowing things up. That’s their problem.

It’s probably too late to ask that we replace the parades with job fairs this year. But if you run or manage a business, and find yourself in the position of being able to bring on a new hire the next year or two, here’s to hoping you think hard about including veterans in your search, too. I’m biased, but I think veterans are easily the most undervalued assets in the world of human capital. And these guys have certainly earned it.

Happy Veterans Day.

Here, however, is an excellent graphic, originally from this blogger, that shows one of the under-reported aspects of both the Occupy Wall Street crowd and the Tea Partiers.

What I believe both groups are concerned with at a very high level is really corporatism – not capitalism.

The angst of both groups seems to stem from independent observations that we are headed into a world of corporatism, where large companies give financial support to politicians who then lend legal support for those same companies to fend off competitors and provide regulatory barriers to entry.

“The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatsoever,” wrote Adam Smith in 1776’s The Wealth of Nations. And he was the first true free market thinker, mind you.

I think we all realize what the cozy relationship between pols and corporations means when it comes time to vote. Something like 94% of all federal elections in this country are won by the candidate that has raised the most money. But what about the impacts going the other way? How does that relationship impact corporations, as opposed to voting booths?

Hard to say, but I’ll take a guess. I think it’s likely linked to a long-term decline in corporate R&D. More specifically, once companies learn that they can realize higher or more sustainable profits by hiring lobbyists instead of engineers, that’s all the incentive they’ll need to go with the lobbyists. It’s the cold, rational choice – in the short-term, mind you. And in a world where the average stock is held for just 22 seconds, it’s a mistake to underestimate how short-term many management teams can be in their thinking. I’d also estimate that buying a politician’s favor has a much better ROI than designing, manufacturing and launching a brand new product into the jungle that is the open market. See Solyndra, for instance. Or LightSquared. Or the S.E.C., even.

At some point, however, after enough of those engineers have been replaced by lobbyists, and as small businesses that refuse to play by those same rules continue to struggle, innovation is going to stagnate. And I think that’s a huge risk here.

I would submit that R&D is an investment that many public corporations have grown to believe is an unnecessary expense, due at least in part to corporatism. That among other things means we are growing less innovative in the areas that fundamentally impact our economy the most. We as a country seem to have already lost I don’t know how many years of progress in math and science as some of this country’s brightest young minds went to work for hedge funds. And our venture capitalists continue to fund a mind-numbing number of companies that don’t appear to solve any truly meaningful problems.

Now I have no idea, for instance, how to really fix our dependency on foreign oil, but I do know that no politician in this country is going to take the draconian steps that would be required to solve that problem through just policies and regulations. So the good news, Silicon Valley, is that we have some big problems that only technology can solve. And when it comes to anti-corporatism, you are our Obi-Wan.

So please, no more Farmvilles. It’s time to put away childish things.

Income inequality is something that all responsible governments have always wrestled with. And I would argue that it was the desire of politicians to start narrowing the gap between haves and have-nots 15 years ago that helped sow the seeds for the Great Recession to begin with. That and just plain old greed, I mean.

But what’s different now is that both sides of the political spectrum are claiming the usual tools aren’t working. I think they’ve realized that rational solutions are too often compromised by corporatism. And they’re rightfully torqued.

If you asked anyone in the Tea Party or OWS to list the causes of the Great Recession, I’d bet few if any of them would mention a synthetic CDO. But they all recognize a failure of character when they see it. And I think that speaks to something that both Wall Street and D.C. will never be able to fully overcome again.

So I’m hopeful that some long-term good comes out of both the Tea Party and Occupy Wall Street. The division between them seems to be that one side doesn’t trust Big Business but does trust Washington, and the other side doesn’t trust Washington but does trust Big Business. Once both groups learn to not trust either Washington or Big Business, they will find common cause. And who knows where that movement could go…but here’s to hoping it ends with some former start-up engineers running D.C. some day.

P.S. Here is my favorite sign from Occupy Wall Street.

Hat tip Swimmer.

It’s time to shut the SEC down and start over.

We should need no further justification then those recent allegations that SEC staffers have been intentionally destroying documents related to initial investigations. Or that the SEC completely missed Bernie Madoff and his $65 billion scheme – despite repeated warnings from this guy. Or maybe our justification to start over should just be that the SEC blessed the rating agency models before the credit crisis. Or perhaps because when markets were collapsing, S.E.C. staffers apparently sat around and watched porn.

Take your pick, I suppose. Regardless of the reason, the need to overhaul the SEC is a bigger issue than politics or ideology. It has nothing to do with free markets or red tape.

I’m all for free markets, but as I’ve said before, don’t confuse them with what goes on on Wall Street. I happen to think it’s ridiculous that I can’t build a shed in my own backyard without getting permission from someone in the local government planning office. But it’s a big mistake to think that the same annoying hassles that we all put up with every day are magnified even more for Wall Street firms. It’s just the opposite. The rules have been written to enable them, really – and in no small way by the SEC.

Wall Street and the NBA

My analogy about regulation on the Street goes something like this:

Wall Street for the past decade has been like the NBA – you’ve got a ton of very motivated, ultra-competitive people banging heads with each other, night after night. And there are literally hundreds of millions of dollars at stake.

Unlike the NBA, though, on Wall Street, it has been expected that the players will call their own fouls – and they won’t get paid unless they win.

I’m of the opinion that you need a referee to have at least some clearly defined boundaries, both in the NBA and on Wall Street, or else things eventually just stop working. And as much as the players in the NBA complain about the refs, I don’t know any who have suggested banning refs and rules outright. I’d bet most of the players also realize the refs help keep their competitors in check, too. The stakes are so high that they need the referees, or else it’s a race to the bottom as soon as the clock starts.

And to make a key distinction here: I think the thing that’s been missing on the Street for too long is just plain old accountability, and that is, by definition, hard to regulate. But we absolutely need to try, because as per the years leading up to the credit crisis, the first effect of not having any real rules is that common sense goes right out the window. The second effect is a weakening in the enforcement of whatever major rules are on the books. And that’s bad for all of us, because as bigger rules get violated, many small dumb ones pop up in their place.

I also don’t believe that Wall Street is so corrupt that it needs more rules – it’s just that no one is wise enough to know how to act without them.

Not to get too grandiose about this, but it’s only after you establish and compel compliance with certain rules that anything resembling freedom is even possible – whether we’re talking about free markets or letting your toddler walk around the kitchen. Good Big Rules don’t have to “restrain” markets anymore than banning double-dribbling slowed down Michael Jordan. But I agree there is a real risk in having too many Bad Little Rules, so all this needs to be done intelligently.

Whose Job Should This Be?

I would submit that the markets work better with a solid referee. And there are certain things a referee needs to be able to do for the players to take him seriously.

I believe it should go without saying to anyone alive in 2008 that the “self-policing” approach to regulation just does not work on Wall Street. And while I’m normally all for doing things smarter/leaner/better, it is also undeniable that when it comes to enforcing laws, the government has a monopoly on the ability to incarcerate. That would seem to mean that this particular role in the markets has to be filled, alas, by government – for the same reasons that you want the cops in your town to be real policemen, not pastry chefs trying to make a few extra bucks at night.

There are also economies of scale to be had in keeping enforcement a role of the government – namely, that investors are too numerous and scattered to either get informed or enforce their own rights without paying through the wazoo. They need an organization to not only represent them, but which is proud of defending them. And finally, a central policing authority solves what would otherwise be a nasty coordination problem. We need someone to standardize and enforce accounting rules among public companies, for instance.

In the case of securities law enforcement, then, I would submit that the best institution to play this role is, like it or not, government. But let’s not confuse that with being expensive, wasteful and bureaucratic. This is the new SEC we’re talking about.

So, in addition to Bill Cohen’s ideas, here are ten ways I would rebuild the SEC:

1. Arm them.

Seriously. As a former Coast Guard officer, I will tell you unequivocally there is nothing as effective as compelling compliance with rules than calmly knocking on someone’s workplace door, stepping inside, and then, after politely exchanging greetings, chambering a round in a shotgun.

Brother, your heart probably skipped a beat just reading that sentence, no? See what I mean?

Relax. I’m not a gun nut, and I was a thoroughly undistinguished boarding officer. My point, though, is that Teddy Roosevelt had it right about that big stick thing. When it comes to visiting the workplace of someone in an industry that you regulate – whether that workplace is a pilothouse or a trading desk – the difference between showing up with a briefcase compared to a Beretta is unmistakable.

You could be stopping by that workplace just to pick up pink princess cupcakes. Doesn’t matter. Once someone recognizes you are a law enforcement agent carrying a weapon, and that you are interested in talking to them – even for the most benign reason – there is no confusion about your relationship. In the law enforcement community it’s called “officer presence,” and among other things, it makes it immediately clear you are not interested in “soliciting feedback.” You’re not there hoping to land a job at that same firm next year. And there certainly is no confusion about being “partners in industry.”

Think I’m nuts? Perhaps. But, quick, answer this – do you think the agents in the FBI who investigate financial crimes pack heat? Should there be a difference between those guys and agents at the SEC? I don’t think so. SEC agents should also be able to conduct surveillance, monitor court-approved wiretaps, review all records, and go undercover. Period.

At the new SEC, agents could not only indict, but they could cuff, Miranda and full-on roundhouse kick the bad guys. Because I’d bet a pretty good way to deter the next Bernie Madoff is to have a dozen YouTube clips of the last Bernie Madoff getting repeatedly pile-driven right into his polar bear skin rug by a former Alabama linebacker – right before agent Chuck Norris shows up and goes Rocky-in-the-meat-locker on him.

How will this not become the next great reality show?

In any case – the only difference in my mind between FBI agents and the new SEC agents would be that only a select few SEC agents would actually get bullets. So, you know, the lawyers and accountants would have to carry guns, but they’d have no ammo.

I’m not a complete idiot, people.

Otherwise, game on. The point is:

Enforcement, enforcement, enforcement.

The SEC is run by lawyers. It should be run by cops.

Plus, cops are far cheaper.

2. No betting against your clients.

I can live with the fact that all financial advisors are not held to a fiduciary standard. Among other things, that helps my firm find clients. But if you’re not going to be a fiduciary, can we agree that at the very least, you should not sell a lousy product to a client – and then immediately turn around and bet against that same product?

Seems like a no-brainer, and once we’ve got a slew of whoop-arse cops at the new SEC, the cost to enforce this rule is next to nothing.

This, by the way, would be known as the Vampire Squid rule. Thank you, Goldman.

Update: Glory be! It appears this rule might actually become law in the asset-backed securities market. Stay tuned.

3. Truly independent leadership.

SEC commissioners should be politically and financially independent. Barring that, commissioners should be appointed based exclusively on merit. This “five political appointees” thing is absolute horse kaka.

I’d actually like to see the SEC be moved under the Department of Justice, too, just to have some semblance of independence from politics, although I concede that it may be naive to think there is any less politics at DoJ. Nonetheless, my point is this: how many lobbyists do you think just stroll on into FBI headquarters every day?

Exactly.

I’d also say SEC employees should be forced to take an oath to protect the small investor, except I have little confidence that politically appointed commissioners would really honor it, anyway. But as Cohen suggests, the SEC cannot be a revolving door to Wall Street – and I think that having politicos running the agency helps create that door.

What sort of career path is there for an SEC staffer, exactly? No matter how hard you work and how committed to the cause you might be, you’ll never be able to reach for the brass ring at the top of your organization. No, my little striver – those chairs are reserved only for people who can bring politicians dumpsters full of money.

No wonder morale is in the dumps at the SEC. Starts at the top.

4. Incentivize them.

The agency’s budget should be as insulated as possible from politics. It could be funded, among other means, for multiple years at a time, or by, say, the cash from SEC victories in court. And in that case, like investment bankers, agent’s earnings could be a percentage of those winnings. Also, there could be lifetime clawbacks – so agents couldn’t chase dumb cases or over-reach in trial without fear of losing some money, too.

Whatever the mechanism ends up being, the means by which these guys have historically been incentivized has been an abject failure. So, get on that, someone.

5. Use qualified shorts as consultants.

Or at the least, have an enforcement hotline.

Any microcap investor worth his salt could have told you five years ago that Chinese reverse merger companies were going to be a real problem, but the system was not set up to in any way acknowledge reports of it, let alone shut it down. There currently is no real mechanism for market participants to raise a red flag to the regulators on anything suspicious. So if I have a problem with the Fruit Loops I just scoffed down at brekkie, I can look at the back of the box to find out who to call…but if I can prove a company is playing fast and loose with that whole “GAAP compliant financial reports” thing, there is nobody at the SEC whose job it is to take my call seriously. This is crazy.

The process I’d like to see would be something like this: Short sellers (or suspicious longs) can send confidential reports about possible corporate and/or market violations privately to the SEC. The agency has 30 days to respond, again in private. If the SEC settles or successfully prosecutes a case based on that work, the referrer gets compensation of some sort – perhaps a healthy a percentage of that settlement, for instance. If shorts waste the agency’s time, though, they will be billed hourly at an exorbitant rate, subject to clawbacks and/or summarily suspended from the program.

The point is that talented shorts are often the catchers in the rye, but the SEC treats them all as if they’re untrustworthy, vindictive cowboys. They good ones deserve to be heard. And the best could be also tasked with privately investigating other leads the SEC has received.

6. Naked shorting and naked credit default swaps should both be banned from the earth.

No exceptions. That is all I have to say about this.

7. No leveraged ETFs.

One of the biggest hypocrisies in enforcing even basic market rules today is that while only supposedly sophisticated investors can invest in hedge funds, anyone with one eye and a thumb can buy inverse, supra-leveraged ETFs in about two seconds online.

Hedge funds, though often wildly speculative, still have an element of adult supervision. ETFs do not, and given the trillions of dollars involved, it strikes me as stunning that ETFs get a complete free pass here.

If not addressed, this will not end well.

8. Encourage the development of some real tools.

The SEC needs a Y Combinator for financial enforcement start-ups. The agency is trying to fight Star Wars battles with Last of the Mohicans tools. Insider trading, for example, is extremely hard to detect when you’ve got multiple portfolio managers running one pool of money. This is a problem, however, that three 25 year olds in Silicon Valley could probably solve if you incentivized them with enough stock options and FourLoko.

Instead of solving these kinds of problems, though, most of those Valley kids seem to be hunkered down coding video games that slingshot fat cartoon birds into grinning green pigs. And I can’t blame them, frankly. As far as I can tell, there is literally no market supporting the development of any sort of technologies to combat financial fraud on Wall Street. And that’s a shame, cuz the right start-ups could make an absolute killing.

I, for one, would pay top dollar for some reasonably cool-looking glasses that would reveal the true identities of posters on Yahoo! message boards to start.

9. Crack down on high frequency trading.

HFT is legalized frontrunning by hackers. It’s also quickly becoming a commodity service, so while I suspect the market is going to reduce profits for almost all of these guys to zero before too long, the ones that will survive should absolutely be regulated more aggressively. That 70% of trades everyday are done by computers right now is, simply, insanity. The only thing more insane is that the SEC has yet to stop it.

For instance, I’d like to see the SEC make it illegal to hold a stock less than 60 seconds. To deal with quote stuffing, all limit orders should be required to stay open for at least one second. And master order numbers should be confidential.

Done. Problem solved with a law that can be promulgated in full on Twitter.

10. Restore the uptick rule.

This would not only put a damper on amateur shorting, but it would have the side effect, as Doug Kass points out, of neutering HFT.

Again, I am in no way against shorting. At least, I am not against shorting by people who know what they’re doing and are doing it for the right reasons. The problem these days is that any idiot can short anything, and many do. I think the resulting volatility makes people question how fair the markets really are – and they may have a point.

In general, I think it is important to offer some minimum sort of base level protection for small investors from powerful stupid people – those who are long or short. When it comes to the shorts, though, I also think it’s important to protect the markets from what over the last five years has seemed to morph into collusion between prideful skeptics who claim they’re relying on reason to short something…but who really just have outsized financial incentives to constantly spread false rumors. And restoring the uptick rule would address this issue satisfactorily to me.

Other Ideas?

I could go on, but too much more and I’ll start to get cynical. I should point out that we do have the best, most mature markets in the history of the world, and up until relatively recently, they did pretty well without much oversight. The problem is, though, that we cannot afford to repeat our more recent mistakes of regulatory omission – many of which were enabled by a feeble, possibly corrupt regulator that has long been captured by the same institutions it’s supposed to be watching.

So while not everyone will agree with the ideas above, I think we can probably agree that it is time for a new approach, no?

Bloomberg Businessweek

I have no idea if they’re making any money off it yet, but not only did The Mayor blessedly put the old lousy Businessweek out of its misery, but the new version has become, almost overnight, the best popular business magazine out there. And I get ‘em all, though I often wonder why…Forbes, Fortune, Bloomberg Markets, HBR, Kiplingers, Money, SmartMoney, Inc, and, oh yes, FastCompany, plus some others I’m probably forgetting. The new BBW is top dog, in my humble opinion. Plus the new iPad app is terrific.

And I don’t think I’m being hyperbolic to say that the arrival of Bloomberg Businessweek should actually give us some hope for financial journalism. Until it showed up, the best financial journalism of the past three years has been in…wait for it…Rolling Stone and Vanity Fair. Seriously. I am convinced my postman thinks I’m living a double life. But if you’ve wanted to get any true insight from the popular financial press about the shenanigans that consumed Wall Street, you’ve had to read Matt Taibbi and Michael Lewis – although I should also point out that the Financial Times’ Lex page is consistently good, also.

Can’t say the same for the WSJ anymore, by the way. It’s trying so hard to compete with the NY Times that it’s rendered itself useless in terms of actionable investing ideas anymore.

Here are the two latest Bloomberg Businessweek articles that motivated this post.

1 – Taco Bell and the Golden Age of Drive-Thru

2 – Why Bin Laden Lost

Okay, that second one has nothing to do with business, and it starts with an odd premise, but follow it through to the end for a brilliant finish.

And if you missed Mary Meeker’s cover story on “USA Inc.” a few months back, check that out here, too.

So what do you say? Let’s hear it for old media!

Good morning, everyone. Before I even start talking about investing, I wouldn’t be a good Rotarian if I didn’t plug the Upper Keys Rotary’s Gigantic Nautical Flea Market. It’s Saturday & Sunday, February 26 and 27 at Founders Park in Islamorada – and if you’ve never been, it’s a huge event and we raise a ton of money for scholarships. If you can’t come, I hope you’ll help us get the word out. I’ve got some brochures over on the table if you’re interested.

Thank you for having me. I’m Cale Smith, and in August of 2008, I started my own independent firm, Islamorada Investment Management. I’m a portfolio manager, which means I run two funds that I created. My background prior to starting my firm was as a stock analyst – not as a broker or financial planner, but being focused on just researching and analyzing public companies, and sometimes telling the guys who run the funds what to buy or sell. And now that’s all I do – run those two funds of my own. I still don’t do financial planning, or buy or sell stocks for other people, although I have plenty of strong opinions about how a lot of those things are usually done on Wall Street.

I built my firm to focus on what I most enjoy – analyzing companies – and I don’t make money on commissions, referrals, or hidden fees. IIM is a fee-only firm, which means my fees are based just on the amount people invest with me. I am also a big fan of Warren Buffett when it comes to investing – I’ve made the trek to Omaha with 70,000 other people to attend the annual meeting of his company Berkshire Hathaway, and my own investing philosophy is probably about 90% Buffett. I also don’t own any other stocks, bonds or mutual funds…every dime my family has saved is in the two funds that I run, so I eat my own cooking, as they say.

In any case, the summer of 2008 was a pretty auspicious time to start an investing business…you’ll remember that was a few months before Lehman Brothers imploded, before Merrill Lynch sold itself to Bank of America, and before anyone had ever heard of Bernie Madoff. Investors were running for the hills back then – which made for a terrific time to start an investment firm, actually. I’m happy to say that both the funds I run have doubled in value since launching them, though it’s been anything but straight up. The past few years at times have felt like dog-years. There are as you probably already appreciate some real challenges to being a good long-term investor these days, even for professionals – and that’s what I really wanted to talk about this morning.

If I had a formal title to this little presentation, I think I’d call it “Wall Street: Yes, it’s Become a Big Casino – But Here’s the Silver Lining.” That’s the silver lining for the motivated long-term investor, anyways…I think everyone here already has a pretty good sense of the downside in the casino.

And if there is only one thing that sticks in your mind later on today, I hope it’s the answer to this question:

Would anyone care to guess what the average holding period for a stock is these days?

In other words, what is the average amount of time that elapses between when someone buys a stock, and then sells it?

Anyone?

22 seconds. The average amount of time that an investor held a stock in 2010 is 22 seconds. I think that’s just stunning. The real irony, though is that 22 seconds is actually an improvement, because in 2009, the average holding period was only 20 seconds.

Now why is that? Well, it turns out that the reason it’s only 22 seconds is because about 70% of all the trades that happen every day on Wall Street are actually being done by computers. And much of that is called high frequency trading, and it is literally machine versus machine, algorithm versus algorithm, competing in milliseconds. Do you remember that movie War Games that came out in the 80′s, with the big green mainframe computer – it was called WOPR – that almost started a thermonuclear war? These computers and their programmers put that machine to shame. They’re more like giant vacuum cleaners that cruise around the markets sucking up fractions of a pennies at a time, making billions.

It’s not just the computers that make it a casino, though. There’s the derivatives – a whole other subject which I am tempted to skip, because it makes people’s eyes glaze over – but which I think is important to at least acknowledge. Anyone heard of credit default swaps? Never mind all the jargon about them…here’s an analogy that I think best illustrates what they are all about.

Let’s say Josie over there knows that Ron here is a horrible driver. She calls the insurance company and takes out a policy on Ron’s car, because she’s got a feeling that something bad might happen, and she figures she might need some money if it happens to her.

You can probably sense something isn’t quite right in this scenario, and you’re correct. There are a handful of problems. The first is that Ron has no idea Josie has taken out an insurance policy on his care. The second issue is that even though Ron’s car is only worth $10,000, Josie can take out an insurance policy for $1 million. The third issue is that Ron’s other neighbors can also start taking out insurance on his car, too – not just Josie. So before long, the entire neighborhood is insuring Ron’s car.

Now I’m not saying that Josie is going to sneak out one night and cut Ron’s brake lines – but I am saying that should something untoward happen to Ron’s car, nobody is going to complain. In fact, his neighbors would make a lot of money, so I think it’s safe to say they might be happy about it.

Credit default swaps are institutionalized speculation – and they will still be, in spite of this financial regulation that passed last year. They are often traded by 27 year-olds in midtown Manhattan over instant messenger. And if you totaled up the GDP of every country in the world, those trillions would still be dwarfed by the outstanding notional value of credit default swaps floating around. It’s a huge number.

The third reason the Street resembles a casino is also due a certain kind of culture that can be hard to articulate without offending the good folks who work on Wall Street. Or casinos, even. I don’t watch a lot of TV, but somehow I happened to catch 60 Minutes last weekend, and I thought there were a few seconds in the show that typified that culture. The show did a segment on the man believed to be the world’s best sports gambler. Makes millions in Vegas, daily, betting on sports. This guy was apparently the undisputed prince. I thought it was pretty telling, though, when the interviewer asked him, “Have you ever been hustled by anyone?” Sure enough, his answer started out, “Well, a couple of years ago, there were some guys from Wall Street here…”. Turns out this prince been out-hustled by the real gambling kings.

In any case, it’s not my intent to rail against Wall Street all morning. It’s too easy, honestly, and it will eventually make you a bitter cynic. And I think this goes without saying, but I’ll say it, anyways – I am an ardent believer in American businesses. Just don’t confuse free markets with what goes on on Wall Street.

So my point is basically this: in spite of all the chaos and at times just pure insanity out there, you can, as an individual investor, still do well. And I tend to think there are really two reasons why.

The first reason is that because, in my opinion, everything important that you really need to know about successful investing has already been written down.

You can become a really good investor by reading two books by a guy named Benjamin Graham written back in the 30′s and 40′s. And actually, that’s not necessarily just my opinion. The empirical evidence that is Warren Buffett and his $50 billion net worth would also support that same notion. Plus, nowadays, you can learn direct from Warren Buffett himself by reading all of his letters to his investors in Berkshire Hathaway. Even better – those letters are all available for online. For free. If you did nothing else but read those books – Ben Graham’s Security Analysis and the more accessible The Intelligent Investor – if you read them slowly and deliberately and really internalize them, I think you’d be better off than 90% of the other investors out there – professionals included. You’d be surprised how little structure there is to the way most professionals invest.

The second reason that I think individual investors can still compete really comes down to this:

Wall Street puts too much emphasis on talent and pedigree, and not enough on plain old hard work.

If Wall Street were an NBA team, it would be the one that, every year, drafted only high school seniors who look great on paper. Most people don’t do the work in actually analyzing a company – they take shortcuts, all the time. That’s true on the Street, too – but at times it’s more complicated because the guys who are doing the work have conflicts or allegiances you aren’t aware of.

The Street is really built on this idea that certain people are just rock stars – born to trade. The higher echelons of Wall Street tend to hire just those people with Ivy League backgrounds, and who have, let’s say, a common worldview – and I think that obsession with “talent” is also why those guys are paid such ridiculous sums. It’s also why people seem to hang on the every word of whoever this week’s market guru might be.

But that talent is a myth. I would have thought 2008 would have proved that to the world, but people forget quickly. After a certain point, pedigree is meaningless, and it’s your work ethic that matters.

My point is that if you do the work – if you really read company filings and put the time in when reviewing their financials – and assuming you can think ahead more than 22 seconds – you stand a pretty good chance of beating many of the guys on Wall Street over time.

So for those of you with the interest, I would encourage you to try to become a better investor, as opposed to being a consumer of financial products. Now, valuing a business is a subject worthy of a whole other talk sometime, but its not as difficult as you might think, either. If you have run, worked at or managed a small business in your life, I’d say the odds are pretty good that you’re already better at it than you might think. There really isn’t much difference between counting the cash in the register every night, and what I do all day long.

To be clear, I think you need to have an investing philosophy, especially when things are uncertain like they’ve been the past few years. I think Buffett’s philosophy is the place to look, but his may not be the right one for you. There are certainly others to consider. But I would urge you to find one that makes sense to you and stick with it – or find someone who you can trust to do it for you. As one of my other favorite investors once said, “Investing without a philosophy is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”

And with that, I’m happy to take any questions you might have.

There was some good back and forth in the informal Q&A that followed afterwards, which I would summarize like this:

You need a referee to have at least some boundaries, both in the NBA and on Wall Street, or else things eventually just stop working. And as much as the players complain about the refs, most of them also realize they help keep their competitors in check, too. So I think this is all much bigger than politics.

These NTF platforms actually drive up the cost of the funds. Each fund pays the discount brokerage 40 basis points or 0.4% per year to be on the platform. The investor buys the fund because there is no upfront fee, but they pay a higher annual fee.

Seems a bit ironic, no?

Read the whole post here.

“Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.”

Great article from ProPublica – “Banks’ Self-Dealing Super-Charged Financial Crisis.” Here it is in its entirety. Also includes these great graphics (click to enlarge).

Good article today in the WSJ about what happened on May 6th.

“…the Dow Jones Industrial Average suffered its biggest, fastest decline ever, and hundreds of stocks momentarily lost nearly all their value. So many things went wrong, so quickly, that regulators haven’t yet pieced together precisely what happened.

A close examination of the market’s rapid-fire unraveling reveals some new details about what unfolded: Stock-price data from the New York Stock Exchange’s electronic-trading arm, Arca, were so slow that at least three other exchanges simply cut it off from trading. Pricing information became so erratic that at one point shares of Apple Inc. traded at nearly $100,000 apiece. And computer-driven trading models used by many big investors, apparently responding to the same market signals, rushed for the exits at the same time.”

Read it in its entirety here.

I have no idea what any of the above has to do with long-term investing, but it’s going to make one helluva cyborg movie.

Previous posts on High Frequency Trading include this one, and this video. Sadly, there will probably be more posts in the future.

“No. Shares look cheap, but management is incompetent.”

Sometimes it’s just that simple.

Regardless of how inexpensive shares might get, I have no desire to be a partner in that particular business. BP is less integrated than its peers, seems overexposed to Russia – at least to a layman like me – and, among other things, now carries with it huge uncertainty in terms of future cash calls related to this spill. And that’s about as much thought as I have given it. That I live in a small fishing village near the Gulf could be coloring my judgment here, but if so, that’s a bias I’m okay having.

I suppose there is probably a moat of some sort around BP’s business in terms of scale and/or reserves, but it does not seem particularly wide. And if you’re investing in a small-to-no moat business, management makes all the difference.

That, incidentally, is one of the advantages of owning a wide moat company…the business should do okay even if management does dumb things.

We do still own Contango in Tarpon, and we now own shares in another deepwater E&P company, but that’s a subject for another time.

Developing story. More here. But I’m afraid I’m just not buying the “dumb trader” excuse. It’s not like he mistakenly added an extra zero before hitting the return key. More likely, if there was indeed an error, the odds seem high that it would be related to high frequency trading.

Ah, Wall Street. Don’t be so afraid to be competent!

And wasn’t there a movie about this sort of thing?

The MBA sold its headquarters building on a short sale for $41.3 million…a little more than half the $79 million it originally financed in 2007.

I’m not sure how they could even attempt to spin that. Sums up this mortgage crisis pretty well, though, don’t ya think?

The frenetic pace. Silly banter. Faux controversy. Flashy things.

I’d say they nailed it.

First State Bank here in the Keys has opened an account to collect donations for the Red Cross and will match the donations. You can also help by visiting the Red Cross or Mercy Corps websites.

If you are aware of other relief efforts, please add in the comments. Thank you.

Update: Here’s a link to a good article on KeysNet, “How Keys residents can help with Haiti relief.”

Who cares if Wall Street ‘talent’ leaves?

If lower pay lures some of Wall Street’s finest away, so be it. It’s not as if the best and brightest were doing a good job to begin with.

By Colin Barr

NEW YORK (Fortune) — There’s no need to fear a Wall Street brain drain — despite the crackdown on pay by Washington.

On Thursday, White House pay czar Kenneth Feinberg outlined compensation restrictions at seven firms that got special bailouts, and the Federal Reserve proposed to review pay practices at 28 unnamed giant banks.

Critics warn that reining in pay makes it hard to keep talented employees. Hemmed in, institutions like AIG, Bank of America and Citigroup could lose their best people.

These firms would then perform even more abysmally, if that’s possible, leaving them hard pressed to repay tens of billions of dollars of taxpayer-backed loans.

Still, we say Godspeed to this “talent.” After all, the traders and suits in the corner offices don’t exactly have an unblemished track record. In 2008, Citigroup, BofA and Merrill Lynch (since acquired by BofA) posted a grand total of $51 billion in losses.

Yet even as they were running themselves into the ground, the firms managed to pay out more than $12 billion in bonuses — including 1,606 million-dollar-plus bonuses, according to a report from the New York attorney general’s office.

“Even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks’ financial performance,” the report said.

Meanwhile, it’s hard to imagine that defection-hit firms would have a lot of trouble finding qualified replacements in the current job market.

Unemployment has doubled nationally since December 2007, when the recession started. Securities industry employment has fallen 10% nationwide and 14% in New York from a mid-2008 peak, according to Bureau of Labor Statistics data, costing some 90,000 jobs in the U.S.

And Goldman Sachs’ charm offensive notwithstanding, it looks like the official response to runaway pay is just starting.

The Fed’s plan to weigh big banks’ compensation plans against their potential for undermining the economy could eventually put pressure on pay at all the big banks.

“This could be a game changer,” said Simon Johnson, an economist at MIT. “There will be a lot of pressure on them in Congress to stick it to the big firms.”

But maybe the best reason not to fret about talent flight is one familiar to cubicle dwellers everywhere: just because someone has a big, high-paying job doesn’t mean they’re good at it.

Take Bank of America, for instance. The bank’s longtime CEO, Ken Lewis, unexpectedly announced his retirement this month, while agreeing to give back his 2009 salary.

Lewis didn’t say why he was leaving, but it seems that criticism over his empire building, mishandling of the Merrill acquisition and outsize pay got to him. The Charlotte Observer reported he had grown tired of the “mud being thrown on him day by day.”

Another helping or two of that mud could be just what Wall Street needs.

Different world today, to say the least. And I’m happy to say that we have since gotten rid of our TV.

It took three weeks to get used to it, but life without the tube is, well, better. I’m online quite a bit every day for financial news and research, anyway, and I’ve found that I’m okay with waiting a day or two to read most other news if it comes with some real analysis behind it. Between iTunes, YouTube and ESPN.com, is there really a need for Comcast any more?

If you surveyed a hundred typical middle-aged Americans, I bet you’d find that only two of them could tell you their blood types, but every last one of them would know the theme song from The Beverly Hillbillies. – Dave Barry

Standard & Poor’s backtracked on ratings cuts issued last week and raised the ranking on commercial mortgage-backed debt from three bonds sold in 2007.

The securities, restored to top-ranked status, had been downgraded as recently as last week, making them ineligible for the Federal Reserve’s Term Asset-Backed Securities Loan Facility to jumpstart lending.

In other words, one of the rating agencies whose previous negligence and/or greed was near the core of the global financial blow-up would like folks to believe that these securities actually deserved to go from being top-rated, or AAA, to BBB- and then back to AAA in the space of a single week.

Pay no attention to the fact those securities were owned by institutions that paid Standard & Poor’s to rate them and that given the dour state of commercial real estate, those institutions really, really need access to TALF.

Here’s more on the deeply flawed ratings agencies.