Sequoia Fund reopens

The Sequoia Fund, after experiencing selling by investors, is reopening its doors May 1 to new investors for the first time since 1982.

The $3.5 billion value fund is celebrated for outperforming the broader market during much of its 38-year history. For years, it was run by legendary stock picker William Ruane, who followed the same approach as Benjamin Graham and Warren Buffett.

In recent years, however, Sequoia has a mixed performance record, lagging the Standard & Poor's 500-stock index in three of the past five calendar years.

Selling by investors caused assets to fall to a level lower than it was a decade ago, the funds' managers wrote in a report for the quarter ending March 31. If that were to continue at that rate, it could "cause us to have to sell stocks that we didn't want to," said co-manager Robert Goldfarb, 63 years old, in a telephone interview Wednesday.

Since its inception in 1970, Sequoia has returned more than three times that of the S&P 500. An investor who put $1,000 into the fund at inception would today have a little more than $200,000, compared to about $63,000 in an S&P 500 fund, according to Morningstar Inc.

Peter Bernstein doesn't like what he sees

Peter Bernstein has witnessed just about every financial crisis of the past century.

As a boy, he watched his father, a money manager, navigate the Depression. As a financial manager, consultant and financial historian, he personally dealt with the recession of 1958, the bear markets of the 1970s, the 1987 crash, the savings-and-loan crisis of the late 1980s and the 2000-2002 bear market that followed the tech-stock bubble.

One of Peter Bernstein's worries: 'If China goes into a recession, God knows.' Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect.

[via iluvbabyb]

Writing Put Options

At Morningstar, we are currently developing a methodology that can be used to combine fundamental research with options investing. One strategy that we think can be used relatively safely is writing put options on wide-moat companies with low or medium fair value uncertainty ratings. In other words, we wish to write put options on companies that, in our opinion, have durable competitive advantages whose fair values lie within a tightly bounded range. Using this strategy, we can generate annualized double-digit returns if the options expire worthless. Or in case the stock gets put to us, we'd end up owning stakes in wonderful businesses at attractive prices--we think it's a win-win situation.

What Goes Up

Just because a stock has risen for 10 years in a row, that doesn't at all mean that it will keep doing so. It may very well fall a little (or a lot) in the coming years.

The 10 Greatest CEOs Of All Time

For good reason, we've become cynical about CEOs. There seem to be no heroes left standing, no one to emulate or believe in. There's an increasingly gloomy sense that we should simply throw up our hands and give up on corporate leadership.

I disagree. Having spent years studying what separates great companies from mediocre ones, I can say unequivocally: There are role models to learn from--albeit not the ones you might expect. It's what inspired me to go back to my research and assemble my list of the ten greatest CEOs of all time.

[via brknews]

The Death of the American Billionaire

For the past decade, Forbes' billionaires list has been as American as apple pie. Gates and Buffett have vied for the top spot, typically followed by the likes of Paul Allen, Dell (Nasdaq: DELL) founder Michael Dell, Oracle (Nasdaq: ORCL) founder Larry Ellison, and Las Vegas Sands (NYSE: LVS) chairman Sheldon Adelson.

But in recent years, the upper echelons have been invaded by international businessmen who are growing their fortunes at an astonishing clip. In the past five years, Slim has increased his net worth eight-fold, thanks to the stellar performance of Latin American telecoms like America Movil (NYSE: AMX). With a fortune currently worth $60 billion, Slim has surpassed Gates and is nipping at Buffett's heels.

Meanwhile, a trio of Indian businessmen lurks behind Gates, poised to leapfrog into the top three slots. Over the past two years, shares of Luxembourg-based steelmaker ArcelorMittal (NYSE: MT) have doubled, helping CEO and 11% shareholder Lakshmi Mittal add $21 billion to his net worth.

As impressive as that feat may be, Mittal is hardly the greatest gainer of the past 24 months. That distinction belongs to Anil Ambani, who has increased his fortune from $5.7 billion to $42 billion in just two years through his ownership stake in India's Reliance Communications and Reliance Power. Anil clocks in as the sixth-richest person in the world, just behind his estranged brother, Mukesh Ambani.

The tremendous performance of international stocks has led to a seismic shift in the composition of Forbes' list. As recently as two years ago, 12 of the 25 richest people in the world were Americans. Now only four are.

What actually happens in your brain when you invest?

Researchers from the fields of neuroscience, economics, and psychology — neuroeconomists — have been discovering the role that biology plays in financial decision-making and identifying why our brains can sometimes unwittingly stop us from making sound investment decisions.

Primal Emotions
Exploration into how the brain works and the emotional impact of investment decisions shows that if you’ve ever felt nervous when watching the price of an investment fall, you may have been receiving a message released by your amygdala, the part of your brain that initiates feelings of fear. The amygdala gives off adrenaline, which triggers our most primitive and protective response, preparing us for “fight or flight.” So while we typically no longer rely on our amygdala’s warning signals for our physical survival, it is still responsible for causing a sense of anxiety to arise when there is an expectation of a financial loss as well as when the market actually shifts.

Also, when faced with the prospect of achieving a positive outcome, certain neurons in the brain release dopamine, a neurotransmitter that regulates feelings of pleasure. The mere anticipation of making money on an investment could cause your brain to release this chemical — even more than when you truly realize the return on your assets.

Staying Centered
Neuroeconomists have found that the prefrontal cortex can help counter the amygdala’s impact and guide our thoughts and behavior as investors. The prefrontal cortex is the area of the brain responsible for evaluating the consequences of your actions: it is where people rationally weigh pros and cons. In effect, the prefrontal cortex can help you control impulsive messages sent from your amygdala by enabling you to concentrate, analyze concepts, and draw logical conclusions.

Smart Investing
To increase your chances of success as an investor, it may help to be aware of how primal emotions might influence the decisions we make and the actions we take regarding money. Understanding these instincts can enable your prefrontal cortex to form thoughtful judgments based on established investment strategies such as pursuing long-term goals and maintaining an appropriate asset allocation. As a result, we may be able to make more informed decisions—instead of allowing our primal emotions to guide our actions in a constantly changing market.

Source: Jason Zweig, Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich, 2007.

[from T. Rowe Price Investor, March 2008]

Morningstar's New Fair Value Uncertainty Rating

At Morningstar, we try to look at the future in a probabilistic way. Practically, that means we spend a lot of time thinking about the range of possible outcomes for the companies that we cover, even though the fair values we publish are, of necessity, point estimates. For example, we use scenario analysis and other tools to estimate a variety of fair values given different combinations of plausible future events.

To better reflect this aspect of our research process, we're replacing our business risk rating with a fair value uncertainty rating. Going forward, we'll rate every stock we cover as having low, medium, high, very high, or extreme uncertainty. In assigning the rating, we'll be asking ourselves, "How tightly can we bound the fair value of this company? With what level of confidence can we estimate its future cash flows?" If you have a background in statistics, you'll recognize that what we'll be doing is estimating the size of a confidence interval for the values of the companies we analyze.