Saturday, June 30, 2012

Big Legal Victory for Bank of America

A New York appeals court upholds a previous decision regarding MBS put-back lawsuits.

In short, once the the $8.5 billion settlement between Bank of America and Bank of New York Mellon (the trustee) is approved a big portion of the mortgage problems at Countrywide will have been dealt with.  

Best Regards,

Disclosure: Long BAC and BAC.WS.A

Postscript - I've been reading some of the legal documents this morning. I particularly liked this footnote in the INSTITUTIONAL INVESTORS’ STATEMENT IN SUPPORT OF SETTLEMENT AND CONSOLIDATED RESPONSE TO SETTLEMENT OBJECTIONS. 

17 Assuming there are 260 court days per year (52 weeks x 5 days a week) and eight hours of court time in each day, there are only 2,080 hours per year of court time available. There are at least 770,000 loans held as collateral by these Trusts. The Institutional Investors concluded that at least 30% of the loans were eligible for repurchase; the Trustee’s expert used a much lower, 14.4% defect rate. Even if one used the Trustee’s calculation, it would mean that 110,880 loans would be the likely subject of repurchase litigation. At a mere thirty minutes per loan, it would take a court—working full time on nothing but repurchase claims—26.6 years to process and decide all of these potential repurchase claims, without considering time for appeal. Even if the cases were spread among a number of courts, and shorter processing and longer trial days were assumed (neither of which is likely realistic), the litigation of these repurchase claims could easily drag on for more than a decade, if not longer.  

Thursday, June 21, 2012

Social Metaphysics

This may be a fairly unusual post because I want to present an interesting concept that I recently have been studying at work.  I have been reading quite a bit lately from a psychologist called Dr. Nathanial Branden.  Many who are familiar with Ayn Rand may have heard of him as they had a relationship for a while. 

The concept I want to introduce is one that Dr. Branden calls "Social Metaphysics".  At first blush you might thing I am off my rocker but the topic has a lot of relevance to investing.  Perhaps you will learn why you are not a good investor and why you cannot bear the pressure of the major stock market swings.

After I introduce the topic I want to make some practical applications specifically to Facebook and then in a future post apply it to Warren Buffett.  The recent Facebook IPO turned out to be quite a flop, but at the right price I would love to own Facebook.  The reason?  Facebook has tapped into the phenomenal power of Social Metaphysics and that alone is a huge competitive advantage. 

So what exactly is Social Metaphysics?  Here is the definition from Dr. Branden.

Social Metaphysics - "the psychological syndrome that characterizes an individual who holds the consciousnesses of other men, not objective reality, as his ultimate psycho-epistemological frame-of-reference."

At first read many will still be scratching there heads but let me lay it out in more layman terms.  It is a psychological syndrome of a person who holds the thoughts of other people, not objective reality (or the truth) as his ultimate mental understanding and framework. 

Let me describe more of the symptoms of this "disease" as Dr Branden has put it. 
  • "Dominated by and obsessive concern with gaining the approval and avoiding the disapproval of their fellow men."

  • Who lack a self generated sense of personal identity and who feel themselves to be metaphysical outcasts."

  • "When confronted with an issue or called upon to pass a judgement, is not to ask, "What is true?" but "What do others say is true?""

  • "Who have no firm unyielding concept of existence, reality, facts, as apart from the judgements, beliefs, opinions, feelings of others."

So what does Social Metaphysics look like in practice? 

Social Metaphysics is Lululemon, or any other brand name, selling clothing at ridiculous high prices.  Why do people buy them?  Because they are obsessed with the approval and appreciation of others.  Go walk around a high school to get some appreciation of this. 

Social Metaphysics is the person who won't go swimming for fear of what people might think of him or her in a bathing suit. 

Social Metaphysics is the person who goes to university to study a subject they aren't interested in just to make their parents happy. 

Social Metaphysics is the person who buys a stock, immediately watches the quote only to watch it fall in price and then feel bad about the purchase.  They are concerned about what others believe the value is (or isn't). 

Social Metaphysics is the person who search the internet for stock tips because they aren't confident in their own decisions.  It is also the person who reads the useless drivel from so called "investment professionals" or "analysts". 

Social Metaphysics is the indecisive person who can't make a decision for fear of disappointing others. 

When it comes down to it, an awful lot of what people SAY and DO is strongly influenced by what other people might think about them.  How often have you heard someone say, "I couldn't do that... what would my family or friends think." 

Now perhaps you are starting to catch on to the relationship between Social Metaphysics and investing.  Before moving on, I do want to say that the subject is also tied to self esteem.  Self esteem is the confidence and reliance upon one self to make decisions about the world and reality.  Self esteem is poorly understood in our society but I define it as the ability to look inward and make value judgements for yourself.  You don't compare yourself to others nor do you seek to be better than someone else (or some other standard).  Your joy comes from being who you are and not in being someone else. 

Now this might be confusing to some because we all know people who appear to outwardly have a sense of self esteem but in reality have very little.  These people use boasting, bragging and arrogance in an attempt to overcome their lack of self esteem.  They are not signs of self esteem but demonstration of their lack of self esteem.  What they seek is your approval because they are unsure of them self.  What you are witnessing is Social Metaphysics. 

Now if you want evidence for this "disease" I would encourage you to look no further than Facebook.  Anyone who has ever been on Facebook will understand this dynamic plays out millions if not billions of times everyday.  You can see millions of people seeking the approval of their peers to compensate for their own lack of self esteem.  Facebook is perhaps Social Metaphysics at it's finest. 


Despite all the fanfare around the Facebook IPO, how much intelligent discussion have you seen about it's competitive advantages?  What I find amazing is that no one is asking the question how much money can Facebook make?  Facebook to me is ingenious because it taps into a powerful social phenomenon and will make piles of money in the process.  Currently they are only earning a billion dollars a year, but don't worry they will make much more.

What I find amazing is the content of Facebook.  Unlike Google that taps into the content of the web, Facebook has millions of users who create their own content daily.  Then through the power of Social Metaphysics, among other things, they have become far more successful than Mr Zuckerberg ever dreamed possible.  Now all Facebook has to do is monetize the madness they have created.  With a half billion current active users, Facebook doesn't have to make much of each user in order to make a pile of money. 

I know most value investors laughed at the $100 billion IPO price and the current market cap of $65 billion, but that may well prove to be a bargain.   That said I don't plan on buying the stock any time soon, mainly because of the short history and how rapidly technology changes.  Just because Facebook has tapped into a social phenomenon doesn't mean they can't mess it up through one stupid move.  This is why Facebook has been slow to make meaningful changes to the site and very slow to monetize it.  Just like Coca-Cola's fiasco with "New Coke", Facebook doesn't want to mess with a good thing. 

As a side note:  When Charlie Munger (Vice Chairman of Berkshire Hathaway) talks about "mental models", the above discussion of Facebook is exactly what he's talking about.  It's about understanding the natural world, combining the hard and soft sciences, and thinking.  As the quote at the top of my blog says, "most people would rather die than think: many do."


Social Metaphysics is powerful social phenomenon that influences the decisions of countless billions of people every day.  By not being able to make value judgements for themselves, Social Metaphysicians rely on others to form the decisions they make.  This strongly tied to self esteem. 

Facebook appears to have tapped into this powerful phenomenon and barring a dumb mistake will make billions in the process.  They have a very captive audience that create their own content.  They now only need to monetize the half billion active users.  This is Facebook's largest competitive advantage. 

My next post will look at Social Metaphysics and Warren Buffet.  We'll also apply the principles of Social Metaphysics to investing. 

Best Regards,


Disclosure - Long BRK.b.