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Monthly Archives: June 2008
Academic studies finally back up what I have found in 10 years of investing:
Seth Klarman is one of the great investors of all time.
This past week, I attended a conference in Jerusalem called ROI120 (ROI 120). I have now heard conflicting things about what ROI stands from “Return on Investment,” to Hebrew for “shepherd” or “leader.”
Lynn Schusterman, a prominent donor in the world of Jewish Philanthropy, pays for 120 young Jews from around the world to fly to and meet in Jerusalem for 5 days. The idea of the conference is have young Jewish leaders from around the world mix, network and share ideas. I met Jews from Warsaw, Santiago, Bombay and London to name just a few places from around the world.
As part of this conference you had to pick a track to follow. You could choose from Youth programs, Israel, Technology, Environment, Arts and Tikkun Olam. I was on the Tikkun Olam track with some pretty amazing people. One person, Joshua Kriger, for example has a project that teaches homeless people job skills in the Washington D.C. area.
We shared ideas, we shared skills and had amazing experiences such as visiting an Israeli Absorption Center for incoming Ethiopians Jews and had dinner at the top of Mt. Herzl with the moon shining down over Jerusalem.
The experience was really special for me, because I met people like Miri Hason. Miri was getting hell from her employers because she was at this conference. Why was she here? She wanted to learn fundraising skills so that she could have an outdoor camp for Israeli and Ethiopian Israelis to promote understanding and fight racism. These are the kind of people that inspire you and push you to do more for society.
People often don’t understand my energy, my passion or me. And they don’t understand my intense desire to help other people. But at the ROI conference I fit right in. I belonged. I was right at home.
In Israel, the right controls about 40% of the vote give or take 5% and the left controls about 40% of the vote give or take 5%. Several minority parties control the rest of the vote, but none of those parties are as powerful as the ultra orthodox, which controls about 10% of the vote. Israel has a parliamentary system and this basically means that no one can govern effectively without the support of the ultra-Orthodox, giving them tremendous power as they can swing control of government to the left or the right as they choose.
Why is this important? Israel is not only a democratic state, but also a religious state. It was founded as a Jewish state. David ben Gurion, the first President, and an ardent secularist always thought that the ultra-Orthodox were an anachronism of another time and century and that it was soon to die away. I think he would be stunned to see how many there are in Israel (10% of the population now) now or how much power they have.
Despite 66% of Israelis not being religious, Israel has a Rabbinic court that controls marriage, divorce, who is considered to be Jewish and other “religious” matters.
Consider that being Israeli does not make you Jewish. Beyond there being Israeli Arabs (16% of the population of Israel), there are lots of Israelis, especially Russian immigrants, who either cannot accurately prove their ancestry or whose father is Jewish or grandparent is Jewish, but not their mother. Under the Law of Return, Israel in 1950 used Nazi Germany’s rule of who was Jewish and who wasn’t, basically any grandparent, spouse or parent could be Jewish, or any convert to Judaism and you could become an Israeli citizen.
So what does this mean? This means that since a religious court controls a big part of social life, there are tremendous iniquities in Israel. You could be Israeli, fight for the Israeli army, help build the country and you still would not be allowed to get married in Israel because an Orthodox Rabbi doesn’t feel that you are Jewish.
This means that secular Jews (remember they are the majority of the population) take ridiculous measures to get married. Israel will recognize marriages outside of the country. So many Israelis get married in Greece. One couple I met got married in Vegas.
But the problems don’t end there. If that couple in the future decides to divorce, they have to go to the Rabbinic court, which has a dim view of female rights and women’s voices in the divorce proceedings.
It gets worse. There is currently a feud going on right now between two orthodox Rabbis. One Rabbi ruled for various reasons that all of the conversions done by another orthodox Rabbi were not valid (thousands of people). This means that if this Rabbi converted you, then you are no longer Jewish. Now if you got married, since you were never Jewish and you can’t get married in Israel without being Jewish, then you were never really married!
All of these types of shenanigans and more drive secular Israelis even further from religion, because if that is religion is, then they want no part of it. This is a reminder for how powerful and important the separation between church and state is, and how absolutely lucky we are in the U.S. to have protections against these kinds of problems.
“Are you religious?” one Israeli asked me.
He then looked for a kipah (yamaka) on my head. There wasn’t one. Then he wondered what I was doing out late on a Friday night.
I then proceeded to explain that you could be religious and spiritual without being Orthodox. He was thoroughly confused as are most Israelis to the concept of Reform or Conservative Judaism.
Secular Israelis (66% of the population) “know” what being “religious” is: Orthodox and ultra-Orthodox. And they want nothing do with religion. They see how many “religious” people act in business, politics and in life and they are thoroughly disgusted. I wonder if these “religious” people know or care how many people they are turning away from religion, God and spirituality.
Regardless, for a long time, there was no middle ground in Israel like there is in the U.S. with Reform and Conservative Judaism. That is slowly changing thanks to people like Rabbi Meir Azari of Beit Daniel (Beit Daniel). Beit Daniel is a thriving progressive (Israel’s name for reform) synagogue in Tel Aviv.
Since Israel is a Jewish state, synagogues get state funding to operate. But since the Orthodox control religious power in Israel, any synagogue that isn’t Orthodox doesn’t get any funding. Rabbi Azari has built a synagogue, a school, and a new 5 story guest house, Mishkenot Ruth Daniel, in which I’m staying. He has done this despite no funding from the government, political pressure and sabotage of property by religious wackos trying to prevent him from opening his doors.
There is such a demand from Israelis for a spirituality and an expression of religion that is not Orthodox, that Beit Daniel is doing over 500 Bar Mitzvahs a year and is marrying hundreds of people, despite those marriages not being considered legal in Israel! These people want a spiritual wedding and go overseas after their real wedding so that it can be recognized by the state of Israel.
I’m a big fan of Rabbi Azari, who I first met in Santa Barbara, and I’m also a supporter of Beit Daniel and how they are trying to bring a more spiritual and open form of Judaism to Israel.
Let me end with a story. I had a wonderful Shabbat dinner Friday night with an Israeli family. The grandmother moved to Israel as a Zionist in 1950. She was never religious. Her husband died a few years ago. A reform Rabbi came over to learn more about her husband. He consoled her and gave a moving memorial service. She told me of how much it meant to her that the Rabbi had done so much for her.
You can literally hear Israelis cry out for change when you talk to them and it breaks your heart.
Warren Buffett has bet a fund of hedge funds that a hand selected group of hedge funds will not outperform the S&P. Very interesting. Which side would you bet on?
There was a fantastic article in the New Yorker magazine (the May 12th, 2008 issue) about Toyota and its “open secret of success.” What the article discussed was Toyota’s relentless pursuit of improving the process of making automobiles. From the fact that any employee can pull an “andon cord” and stop the entire assembly line to address a problem, to “reorganizing factory floors and work spaces to allow for freer and easier flow of parts and products” Toyota has revolutionized the way cars are built and how manufacturing is done in the world.
Yet despite opening its doors and giving tours and explaining just how its does things including a joint venture with G.M. to show them how to better improve GM’s own production system, Toyota continues to lead far ahead of the pack. Why?
The article answers that to Toyota, improvement is not a sudden leap, but rather it’s an incremental process to make things better on a daily basis. The Japanese even have their own word for it, “kaizen”, or continual improvement.
One of the keys to my success, especially in recent years is the relentless focus on improving the process of investing and that is why this article really spoke to me. I continue to work on and improve the process of investing from research, to position sizing to when to sell. As long as I continue to work on honing the process, in the long run my performance should be great.
Here is the link to the article:
This is a fantastic article about Morris Smith leaving his job as the head of Fidelity Magellan and pursuing a life of meaning and study. I think you can learn a lot from his example.
Guess what your return would have been had you invested in China in March of 1998, ten years ago.
Consider before you answer that the last ten years has been unstoppable GDP growth, a miracle in terms of economic change. China has emerged on the scene as an economic powerhouse and it is on the lips of every businessman and politician.
But before we answer how much it has been up in the last ten years, let me tease you with some of the latest stats. The first quarter was a tough one. The MSCI China index was down almost 24%, but despite that the five year average is still up over 40% a year for the past five years. Now that is a serious return and an impressive stat.
However, when we return to my original question of what China would have returned you if you had foreseen how important China was going to be and how great an investment it was, we get a very surprising answer.
That is the average annual return from investing in the MCSI China index since March 31 1998. This despite 40% average annual returns in the past five years.
I use this startlingly data point to make a much larger point. Sometimes large economic trends do not make great investments. And obvious top down trends don’t always make good investments.
Investing in foreign countries is a risky and volatile enterprise and often the long term returns do not compensate you for the variety of risks that you run by investing in these markets. Further, there are a variety of issues to consider including accounting standards, currency issues, regulatory and tax concerns and that’s not to mention the individual company risks as well.
I believe China faces some serious headwinds going forward. Everyone seems to think China can spend anything it wants on commodities such as oil, iron ore, copper, etc., but they don’t. And when you add in the fact that China is about to start importing vast amounts of food as well and that they have a problem with water and one realizes that the country has serious import problems to overcome. And this doesn’t even take into account, the lack of accounting standards, mounting banking problems, a surging gap between between rural and urban Chinese and a lack of clear private property laws.
So before commentators and so-called experts try to convince you to invest in something hot like China consider the longer term record of investing in the country and look deeper into some of the issues affecting the country, you might be surprised by what you learn.
For the record, I have no investments in China or any company listed anywhere that has major operations in China. For reasons cite above, I believe there are better risk/reward situations elsewhere, especially in North America.