May 12, 2016
The past five years have been challenging for long-term value-based asset allocation. We do not believe this constitutes a paradigm shift, dooming such strategies in the future. The basic driver for long-term value working historically has been the excessive volatility of asset prices relative to their underlying fundamental cash flows, and recent history does not show any evidence of that changing. Outperforming the markets given that pattern requires either betting that the excessive swings will reverse over time or accurately predicting what those excessive swings will be. The former strategy amounts to long-term value-based investing, while the latter requires outpredicting others as to both what surprises will hit the markets and how the markets will react to them. Our strong preference is to focus on long-term value, despite the inevitable periods of tough performance that strategy will entail. ... The volatility of U.S. stocks since 1881 has been a little over 17% per year. The volatility of the underlying fair value of the market has been a little over 1% per year. Well over 90% of the volatility of the stock market cannot be explained as a rational response to the changing value of the stream of dividends it embodies. This means that the volatility is due to some combination of changing discount rates applied to those cash flows, and changes to expectations of future dividends that turned out to be incorrect. It is difficult to determine exactly which has been the driver at any given time, but there doesn’t seem to be a lot of evidence for changing discount rates having been a major force. Even in the most extreme overvaluation in U.S. stock market history, the 1999-2000 internet bubble, none of the investors we heard explaining why the stock market was rational to have risen to such giddy heights explained it on the basis that future returns should be lower than history.
With a trial about to begin, lurid and alarming details of the billionaire’s condition and the scheming around him continue to emerge. Many questions will arise in the courtroom—and control of CBS and Viacom could ultimately hang in the balance. ... Redstone is a man who, for decades, dominated those around him. Now diminished, by some accounts a wraith, he is not expected even to be in the courtroom at a trial that centers on what condition he’s in. He will be questioned by each side for 15 minutes at home (the videotaped deposition will be shown only to the judge). Even that small amount of testimony might be too much for him. ... What’s beyond dispute is that this fight has sent shock waves through Redstone’s vast empire. It was this tawdry case—and not a planned corporate succession or steps taken by either board—that forced his belated departure as chairman of the two companies in February, despite his repeated vows that he’d never step down. (He also claimed he’d never die.) It has focused attention on the business woes at Viacom, where profits are faltering, the creative and digital strategies seem suspect, and the stock has dropped 39% in the past year. And it has prompted CBS chief Leslie Moonves to start quietly maneuvering to get out from under the Redstone family’s thumb altogether, according to a Reuters report. ... This account is based on interviews with dozens of people, including Herzer, current and former high-ranking executives of Viacom and CBS, people close to Redstone and his family, witnesses to events at his mansion, and lawyers in the case, as well as hundreds of pages of court records and documents. ... In the end, Redstone’s corporate affairs fell into disarray because he stubbornly refused to put his house in order—scoffing at succession plans, appointing pliant boards, and running his $40 billion enterprise like a family grocery store. ... Christine Peters, a Hollywood producer and onetime Redstone flame, recalls sitting down for dinner at a restaurant in Hawaii with her daughters and the mogul, then about 80, when his steak arrived overdone. Redstone summoned the chef to their table, stuck his fork in the meat, and flung it at him. “Why are you so mean to people?” she recalls asking him. “I don’t care,” Redstone replied. “I’m going to hell anyway.”
Although wildfires in the American West dominate headlines, the single most destructive fire in U.S. history could occur in the Northeast. New Jersey's Pinelands (also known as the Pine Barrens) is the lone island of contiguous forest in the 45-million-person megacity that comprises the Eastern Seaboard from Richmond, Virginia, to Boston — the densest population cluster in the country. Whereas regular fires used to thin out the Pinelands, large swaths have remained relatively untouched for decades due to strict preservation laws. The result is a giant tinderbox of untended woods that's surrounded by 100,000-person suburbs. A Wildfire Risk Assessment published by New Jersey compared the Pinelands to "an inch of gasoline covering all of south and central New Jersey." ... In wildland firefighting, success does not breed success. Stopping fires in their infancy allows forests to grow thicker and more at risk of bad blazes. Before the Forest Service started fighting fires, around 1910, lightning strikes and native peoples used to burn around 50 million Western acres each year. Today, some 30,000 wildland firefighters and their equipment — smokejumpers, fire engines, air tankers — check that number at around 11 million. If that sounds impressive, it's worth noting that 50 years ago about a third as many firefighters kept the annual acreage burned to roughly half what it is today. The flames have become that much harder to control.
Lower Silesia, in southwestern Poland, is a land of treasure hunters. Until the end of the Second World War, the region—covered by mountains and deep pine forests with towering, arrowlike trees—was part of Germany. In the early months of 1945, the German Army retreated, along with much of the civilian population. The advancing Red Army killed many of the Germans who remained. Nearly all those who survived were later evicted and forced to move west. By the end of 1947, almost two million Germans had been cleared out. ... In order to fill the emptied landscape, the newly formed Polish government relocated hundreds of thousands of Poles from the east. The settlers arrived in vacant towns, walked into empty houses, and went to sleep in strangers’ beds. There was furniture in the houses, but usually the valuables were missing. The porcelain dishes, the silk dresses, the fur coats, the sewing machines, and the jewelry were gone, often hidden in the ground: buried in jars, chests, and even coffins. It was a hasty solution—a desperate effort to cache valuables as people were running for their lives. The owners of these possessions intended to return, but most didn’t. And so on steamy fall mornings, when the new arrivals dug in their gardens or tilled their fields, they unearthed small fortunes. ... There were so few consumer goods available that many of the new residents made a living by trading merchandise stolen from German homes. ... as the end approached and German troops departed, the military allegedly buried gold, jewels, art works, and even futuristic weapons. The most famous story involves a German military officer named Herbert Klose, who worked as a high-level police official in the city of Wrocław. After the war, Klose was caught and interrogated by the Polish secret police. ... In a region where treasure hunting is a pastime, they pride themselves on being the best.