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 " Fear not the man who practises 10,000 kicks.
   Fear the man who practises one kick 10,000 times"  Bruce Lee

Story Telling in Business

Homage to Walter Schloss 

by Warren Buffet

That same 2006 document shows off Warren’s gift for narrative as he pays homage to friend and fellow investor Walter Schloss:

Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turneMd 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager.

Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts. Walter and Edwin never came within a mile of inside information. Indeed, they used “outside” information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, “How would you summarize your approach?” Edwin replied, “We try to buy stocks cheap.” So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.

Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It’s particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success. It’s safe to say that had millions of investment managers made trades by a) drawing stock names from a hat; b) purchasing these stocks in comparable amounts when Walter made a purchase; and then c) selling when Walter sold his pick, the luckiest of them would not have come close to equaling his record. There is simply no possibility that what Walter achieved over 47 years was due to chance.

I first publicly discussed Walter’s remarkable record in 1984. At that time “efficient market theory” (EMT) was the centerpiece of investment instruction at most major business schools. This theory, as then most commonly taught, held that the price of any stock at any moment is not demonstrably mispriced, which means that no investor can be expectedto overperform the stock market averages using only publicly-available information (though some will do so by luck). When I talked about Walter 23 years ago, his record forcefully contradicted this dogma.

And what did members of the academic community do when they were exposed to this new and important evidence? Unfortunately, they reacted in all-too-human fashion: Rather than opening their minds, they closed their eyes. To my knowledge no business school teaching EMT made any attempt to study Walter’s performance and what it meant for the school’s cherished theory.

Instead, the faculties of the schools went merrily on their way presenting EMT as having the certainty of scripture. Typically, a finance instructor who had the nerve to question EMT had about as much chance of major promotion as Galileo had of being named Pope.

Tens of thousands of students were therefore sent out into life believing that on every day the price of every stock was “right” (or, more accurately, not demonstrably wrong) and that attempts to evaluatebusinesses – that is, stocks – were useless. Walter meanwhile went on overperforming, his job made easier by the misguided instructions that had been given to those young minds. After all, if you are in the shipping business, it’s helpful to have all of your potential competitors be taught that the earth is flat.

Maybe it was a good thing for his investors that Walter didn’t go to college.

_________________________________________________________________

Gotrocks Family

by Warren Buffett

A lesson in frictional costs and how they slow your snowball

It’s been an easy matter for Berkshire and other owners of American equities to prosper over the years.

Between December 31, 1899 and December 31, 1999, to give a really long-term example, theDow rose from 66 to 11,497. (Guess what annual growth rate is required to produce this result; the surprising answer is at the end of this piece.)

This huge rise came about for a simple reason: Over the century, American businesses did extraordinarily well and investors rode the wave of their prosperity. Businesses continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize from their investments.

The explanation of how this is happening begins with a fundamental truth: With unimportant exceptions, such as bankruptcies in which some of a company's losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B.

And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic -- no shower of money from outer space -- that will enable them to extract wealth from their companies beyond that created by the companies themselves. 

Indeed, owners must earn less than their businesses earn because of "frictional" costs. And that's my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.

To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We'll call them the Gotrocks. After paying taxes on dividends, this family -- generation after generation -- becomes richer by the aggregate amount earned by its companies.

Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyonegrows wealthier at the same pace, and all is harmonious.

But let's now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers -- for a fee, of course -- obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what.

 So the family's annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend, and in a wide variety of ways, they urge it on.

After a while, most of the family members realize that they are not doing so well at this new "beat my brother" game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he'll never outsmart the rest of the family. The suggested cure: "Hire a manager -- yes, us -- and get the job done professionally.

"These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers.

The family's disappointment grows. Each of its members is now employing professionals. Yet overall, the group's finances have taken a turn for the worse. The solution? More help, of course.

It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock pickers. Why, one might ask,should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don't suggest it to them.

The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group -- we'll call them the hyper-Helpers -- appears. These friendly folk explain to the Gotrocks that their unsatisfactory results areoccurring because the existing Helpers -- brokers, managers, consultants -- are not sufficiently motivated and are simply going through the motions. "What," the new Helpers ask, "can you expect from such a bunch of zombies?

"The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with self-confidence, the hyper-Helpers assert that huge contingent payments -- in addition to stiff fixed fees -- are what each family member must fork over in order to really outmaneuver his relatives.

The more observant members of the family see that some of the hyper-Helpers are really just manager Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important,bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.

And that's where we are today: A record portion of the earnings that would go in their entirety to owners -- if they all just stayed in their rocking chairs -- is now going to a swelling army of Helpers.
Particularly expensive is the recent pandemic of profit arrangements under which Helpers receivelarge portions of the winnings when they are smart or lucky, and leave family members with all thelosses -- and large fixed fees to boot -- when the Helpers are dumb or unlucky (or occasionallycrooked).

A sufficient number of arrangements like this -- heads, the Helper takes much of the winnings;tails, the Gotrocks lose and pay dearly for the privilege of doing so -- may make it more accurate to call  the family the Hadrocks. Today, in fact, the family's frictional costs of all sorts may well amount to 20percent of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80 percent or so of what they would earn if they just sat still and listened to no one.

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, "I can calculate the movement of the stars, but not the madness of men." If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the fourth law of motion:

For investors as a whole,returns decrease as motion increases.

A Field Guide to Critical Thinking By James Lett

There are many reasons for the popularity of paranormal beliefs in the United States today, including: the irresponsibility of the mass media, who exploit the public taste for nonsense, the irrationality of the American world-view, which supports such unsupportable claims as life after death and the efficacy of the polygraph, and the ineffectiveness of public education, which generally fails to teach students the essential skills of critical thinking. As a college professor, I am especially concerned with this third problem. Most of the freshman and sophomore students in my classes simply do not know how to draw reasonable conclusions from the evidence. At most, they've been taught in high school what to think; few of them know how to think. In an attempt to remedy this problem at my college, I've developed an elective course called "Anthropology and the Paranormal." The course examines the complete range of paranormal beliefs in contemporary American culture, from precognition and psychokinesis to channeling and cryptozoology and everything between and beyond, including astrology, UFOs, and creationism. I teach the students very little about anthropological theories and even less about anthropological terminology. Instead, I try to communicate the essence of the anthropological perspective, by teaching them, indirectly, what the scientific method is all about. I do so by teaching them how to evaluate evidence. I give them six simple rules to follow when considering any claim, and then show them how to apply those six rules to the examination of any paranormal claim. The six rules of evidential reasoning are my own distillation and simplification of the scientific method. To make it easier for students to remember these half-dozen guidelines, I've coined an acronym for them: Ignoring the vowels, the letters in the word "FiLCHeRS" stand for the rules of Falsifiability, Logic, Comprehensiveness, Honesty, Replicability, and Sufficiency. Apply these six rules to the evidence offered for any claim, I tell my students, and no one will ever be able to sneak up on you and steal your belief. You'll be filch-proof. Falsifiability It must be possible to conceive of evidence that would prove the claim false.  It may sound paradoxical, but in order for any claim to be true, it must be falsifiable. The rule of falsifiability is a guarantee that if the claim is false, the evidence will prove it false; and if the claim is true, the evidence will not disprove it (in which case the claim can be tentatively accepted as true until such time as evidence is brought forth that does disprove it). The rule of falsifiability, in short, says that the evidence must matter, and as such it is the first and most important and most fundamental rule of evidential reasoning. The rule of falsifiability is essential for this reason: If nothing conceivable could ever disprove the claim, then the evidence that does exist would not matter; it would be pointless to even examine the evidence, because the conclusion is already known -- the claim is invulnerable to any possible evidence. This would not mean, however, that the claim is true; instead it would mean that the claim is meaningless. This is so because it is impossible -- logically impossible -- for any claim to be true no matter what. For every true claim, you can always conceive of evidence that would make the claim untrue -- in other words, again, every true claim is falsifiable. For example, the true claim that the life span of human beings is less than 200 years is falsifiable; it would be falsified if a single human being were to live to be 200 years old. Similarly, the true claim that water freezes at 32° F is falsifiable; it would be falsified if water were to freeze at, say, 34° F. Each of these claims is firmly established as scientific "fact," and we do not expect either claim ever to be falsified; however, the point is that either could be. Any claim that could not be falsified would be devoid of any propositional content; that is, it would not be making a factual assertion -- it would instead be making an emotive statement, a declaration of the way the claimant feels about the world. Nonfalsifiable claims do communicate information, but what they describe is the claimant's value orientation. They communicate nothing whatsoever of a factual nature, and hence are neither true nor false. Nonfalsifiable statements are propositionally vacuous. There are two principal ways in which the rule of falsifiability can be violated -- two ways, in other words, of making nonfalsifiable claims. The first variety of nonfalsifiable statements is the undeclared claim: a statement that is so broad or vague that it lacks any propositional content. The undeclared claim is basically unintelligible and consequently meaningless. Consider, for example, the claim that crystal therapists can use pieces of quartz to restore balance and harmony to a person's spiritual energy. What does it mean to have unbalanced spiritual energy? How is the condition recognized and diagnosed? What evidence would prove that someone's unbalanced spiritual energy had been -- or had not been -- balanced by the application of crystal therapy? Most New Age wonders, in fact, consist of similarly undeclared claims that dissolve completely when exposed to the solvent of rationality. The undeclared claim has the advantage that virtually any evidence that could be adduced could be interpreted as congruent with the claim, and for that reason it is especially popular among paranormalists who claim precognitive powers. Jeane Dixon, for example, predicted that 1987 would be a year "filled with changes" for Caroline Kennedy. Dixon also predicted that Jack Kemp would "face major disagreements with the rest of his party" in 1987 and that "world-wide drug terror" would be "unleashed by narcotics czars" in the same year. She further revealed that Dan Rather "may [or may not] be hospitalized" in 1988, and that Whitney Houston's "greatest problem" in 1986 would be "balancing her personal life against her career." The undeclared claim boils down to a statement that can be translated as "Whatever will be, will be." The second variety of nonfalsifiable statements, which is even more popular among paranormalists, involves the use of the multiple out, that is, an inexhaustible series of excuses intended to explain away the evidence that would seem to falsify the claim. Creationists, for example, claim that the universe is no more than 10,000 years old. They do so despite the fact that we can observe stars that are billions of light-years from the earth, which means that the light must have left those stars billions of years ago, and which proves that the universe must be billions of years old. How then do the creationists respond to this falsification of their claim? By suggesting that God must have created the light already on the way from those distant star at the moment of creation 10,000 years ago. No conceivable piece of evidence, of course, could disprove that claim. Additional examples of multiple outs abound in the realm of the paranormal. UFO proponents, faced with a lack of reliable physical or photographic evidence to buttress the claims, point to a secret "government conspiracy" that is allegedly preventing the release of evidence that would support their case. Psychic healers say they can heal you if you have enough faith in their psychic powers. Psychokinetics say they can bend spoons with their minds if they are not exposed to negative vibrations from skeptic observers. Tarot readers can predict your fate if you're sincere in your desire for knowledge. The multiple out means, in effect, "Heads I win, tails you lose." Logic Any argument offered as evidence in support of any claim must be sound. An argument is said to be "valid" if its conclusion follows unavoidably from its premises; it is "sound" if it is valid and if all the premises are true. The rule of logic thus governs the validity of inference. Although philosophers have codified and named the various forms of valid arguments, it is not necessary to master a course in form logic in order to apply the rules of inference consistently and correctly. An invalid argument can be recognize by the simple method of counterexample: If you can conceive of a single imaginable instance whereby the conclusion would not necessarily follow from the premises even if the premises were true, then the argument is invalid. Consider the following syllogism for example: All dogs have fleas; Xavier has fleas; therefore Xavier is a dog. That argument is invalid because a single flea-ridden feline named Xavier would provide an effective counterexample. If an argument is invalid, then it is, by definition, unsound. Not all valid arguments are sound, however. Consider this example: All dogs have fleas; Xavier is a dog; therefore Xavier has fleas. That argument is unsound, even though it is valid, because the first premise is false: All dogs do not have fleas. To determine whether a valid argument is sound is frequently problematic; knowing whether a given premise is true or false often demands additional knowledge about the claim that may require empirical investigation. If the argument passes these two tests, however -- if it is both valid and sound -- then the conclusion can be embraced with certainty. The rule of logic is frequently violated by pseudoscientists. Erich von Däniken, who singlehandedly popularized the ancient-astronaut mythology in the 1970s, wrote many books in which he offered invalid and unsound arguments with benumbing regularity (see Omohundro 1976). In Chariots of the Gods? he was not above making arguments that were both logically invalid and factually inaccurate -- in other words, arguments that were doubly unsound. For example, von Däniken argues that the map of the world made by the sixteenth-century Turkish admiral Piri Re'is is so "astoundingly accurate" that it could only have been made from satellite photographs. Not only is the argument invalid (any number of imaginable techniques other than satellite photography could result in an "astoundingly accurate" map), but the premise is simply wrong -- the Piri Re'is map, in fact, contains many gross inaccuracies (see Story 1981). Comprehensiveness The evidence offered in support of any claim must be exhaustive -- that is all of the available evidence must be considered. For obvious reasons, it is never reasonable to consider only the evidence that supports a theory and to discard the evidence that contradicts it. This rule is straightforward and self-apparent, and it requires little explication or justification. Nevertheless, it is a rule that is frequently broken by proponents of paranormal claims and by those who adhere to paranormal beliefs. For example, the proponents of biorhythm theory are fond of pointing to airplane crashes that occurred on days when the pilot, copilot, anchor navigator were experiencing critically low points in their intellectual, emotional, and/or physical cycles. The evidence considered by the biorhythm apologists, however, does not include the even larger number of airplane crashes that occurred when the crews were experiencing high or neutral points in their biorhythm cycles (Hines 1988:160). Similarly, when people believe that Jeane Dixon has precognitive ability because she predicted the 1988 election of George Bush (which she did, two months before the election, when every social scientist, media maven, and private citizen in the country was making the same prognostication), they typically ignore the thousands of forecasts that Dixon has made that have failed to come true (such as her predictions that John F. Kennedy would not win the presidency in 1960, that World War III would begin in 1958, and that Fidel Castro would die in 1969). If you are willing to be selective in the evidence you consider, you could reasonably conclude that the earth is flat. Honesty The evidence offered in support of any claim must be evaluated without self-deception. The rule of honesty is a corollary to the rule of comprehensiveness. When you have examined all of the evidence, it is essential that you be honest with yourself about the results of that examination. If the weight of the evidence contradicts the claim, then you are required to abandon belief in that claim. The obverse, of course, would hold as well. The rule of honesty, like the rule of comprehensiveness, is frequently violated by both proponents and adherents of paranormal beliefs. Parapsychologists violate this rule when they conclude, after numerous subsequent experiments have failed to replicate initially positive psi results, that psi must be an elusive phenomenon. (Applying Occam's Razor, the more honest conclusion would be that the original positive result must have been a coincidence.) Believers in the paranormal violate this rule when they conclude, after observing a "psychic" surreptitiously bend a spoon with his hands, that he only cheats sometimes. In practice, the rule of honesty usually boils down to an injunction against breaking the rule of falsifiability by taking a multiple out. There is more to it than that, however: The rule of honesty means that you must accept the obligation to come to a rational conclusion once you have examined all the evidence. If the overwhelming weight of all the evidence falsifies your belief, then you must conclude that the belief is false, and you must face the implications of that conclusion forthrightly. In the face of overwhelmingly negative evidence, neutrality and agnosticism are no better than credulity and faith. Denial, avoidance, rationalization, and all the other familiar mechanisms of self-deception would constitute violations of the rule of honesty. In my view, this rule alone would all but invalidate the entire discipline of parapsychology. After more than a century of systematic, scholarly research, the psi hypothesis remains wholly unsubstantiated and unsupportable; parapsychologists have failed, as Ray Hyman (1985:7) observes, to produce "any consistent evidence for paranormality that can withstand acceptable scientific scrutiny." From all indications, the number of parapsychologists who observe the rule of honesty pales in comparison with the number who delude themselves. Veteran psychic investigator Eric Dingwall (1985:162) summed up his extensive experience in parapsychological research with this observation: "After sixty years' experience and personal acquaintance with most of the leading parapsychologists of that period I do not think I could name a half dozen whom I could call objective students who honestly wished to discover the truth." Replicability If the evidence for any claim is based upon an experimental result, or if the evidence offered in support of any claim could logically be explained as coincidental, then it is necessary for the evidence to be repeated in subsequent experiments or trials. The rule of replicability provides a safeguard against the possibility of error, fraud, or coincidence. A single experimental result is never adequate in and of itself, whether the experiment concerns the production of nuclear fusion or the existence of telepathic ability. Any experiment, no matter how carefully designed and executed, is always subject to the possibility of implicit bias or undetected error. The rule of replicability, which requires independent observers to follow the same procedures and to achieve the same results, is an effective way of correcting bias or error, even if the bias or error remains permanently unrecognized. If the experimental results are the product of deliberate fraud, the rule of replicability will ensure that the experiment will eventually be performed by honest researchers. If the phenomenon in question could conceivably be the product of coincidence, then the phenomenon must be replicated before the hypothesis of coincidence can be rejected. If coincidence is in fact the explanation for the phenomenon, then the phenomenon will not be duplicated in subsequent trials, and the hypothesis of coincidence will be confirmed; but if coincidence is not the explanation, then the phenomenon may be duplicated, and an explanation other than coincidence will have to be sought. If I correctly predict the next roll of the dice, you should demand that I duplicate the feat before granting that my prediction was anything but a coincidence. The rule of replicability is regularly violated by parapsychologists, who are especially fond of misinterpreting coincidences. The famous "psychic sleuth" Gerard Croiset, for example, allegedly solved numerous baffling crimes and located hundreds of missing persons in a career that spanned five decades, from the 1940s until his death in 1980. The truth is that the overwhelming majority of Croiset's predictions were either vague and nonfalsifiable or simply wrong. Given the fact that Croiset made thousands of predictions during his lifetime, it is hardly surprising that he enjoyed one or two chance "hits." The late Dutch parapsychologist Wilhelm Tenhaeff, however, seized upon those "very few prize cases" to argue that Croiset possessed demonstrated psi powers (Hoebens 1986a:130). That was a clear violation of the rule of replicability, and could not have been taken as evidence of Croiset's psi abilities even if the "few prize cases" had been true. (In fact, however, much of Tenhaeff's data was fraudulent -- see Hoebens 1986b. ) Sufficiency The evidence offered in support of any claim must be adequate to establish the truth of that claim, with these stipulations: the burden of proof for any claim rests on the claimant, extraordinary claims demand extraordinary evidence, and evidence based upon authority and/or testimony is always inadequate for any paranormal claim The burden of proof always rests with the claimant for the simple reason that the absence of disconfirming evidence is not the same as the presence of confirming evidence. This rule is frequently violated by proponents of paranormal claims, who argue that, because their claims have not been disproved, they have therefore been proved. (UFO buffs, for example, argue that because skeptics have not explained every UFO sighting, some UFO sightings must be extraterrestrial spacecraft.) Consider the implications of that kind of reasoning: If I claim that Adolf Hitler is alive and well and living in Argentina, how could you disprove my claim? Since the claim is logically possible, the best you could do (in the absence of unambiguous forensic evidence) is to show that the claim is highly improbable -- but that would not disprove it. The fact that you cannot prove that Hitler is not living in Argentina, however, does not mean that I have proved that he is. It only means that I have proved that he could be -- but that would mean very little; logical possibility is not the same as established reality. If the absence of disconfirming evidence were sufficient proof of a claim, then we could "prove" anything that we could imagine. Belief must be based not simply on the absence of disconfirming evidence but on the presence of confirming evidence. It is the claimant's obligation to furnish that confirming evidence. Extraordinary claims demand extraordinary evidence for the obvious reason of balance. If I claim that it rained for ten minutes on my way to work last Tuesday, you would be justified in accepting that claim as true on the basis of my report. But if I claim that I was abducted by extraterrestrial aliens who whisked me to the far side of the moon and performed bizarre medical experiments on me, you would be justified in demanding more substantial evidence. The ordinary evidence of my testimony, while sufficient for ordinary claims, is not sufficient for extraordinary ones. In fact, testimony is always inadequate for any paranormal claim, whether it is offered by an authority or a layperson, for the simple reason that a human being can lie or make a mistake. No amount of expertise in any field is a guarantee against human fallibility, and expertise does not preclude the motivation to lie; therefore a person's credentials, knowledge and experience cannot, in themselves be taken as sufficient evidence to establish the truth of a claim. Moreover, a person's sincerity lends nothing to the credibility of his or her testimony. Even if people are telling what they sincerely believe to be the truth, it is always possible that they could be mistaken. Perception is a selective act, dependent upon belief context, expectation, emotional and biochemical states, and a host of other variables. Memory is notoriously problematic, prone to a range of distortions, deletions, substitutions and amplifications. Therefore the testimony that people offer of what they remember seeing or hearing should always be regarded as only provisionally and approximately accurate; when people are speaking about the paranormal, their testimony should never be regarded as reliable evidence in and of itself. The possibility and even the likelihood of error are far too extensive (see Connor 1986). Conclusion The first three rules of FiLCHeRS -- falsifiability, logic, and comprehensiveness -- are all logically necessary rules of evidential reasoning. If we are to have confidence in the veracity of any claim whether normal or paranormal, the claim must be prepositionally meaningful, and the evidence offered in support of the claim must be rational and exhaustive. The last three rules of FiLCHeRS -- honesty, replicability, and sufficiency -- are all pragmatically necessary rules of evidential reasoning. Because human beings are often motivated to rationalize and to lie to themselves, because they are sometimes motivated to lie to others, because they can make mistakes, and because perception and memory are problematic, we must demand that the evidence for any factual claim be evaluated without self-deception, that it be carefully screened for error, fraud, and appropriateness, and that it be substantial and unequivocal. What I tell my students, then, is that you can and should use FiLCHeRS to evaluate the evidence offered for any claim. If the claim fails any one of these six tests, then it should be rejected; but if it passes all six tests, then you are justified in placing considerable confidence in it. Passing all six tests, of course, does not guarantee that the claim is true (just because you have examined all the evidence available today is no guarantee that there will not be new and disconfirming evidence available tomorrow), but it does guarantee that you have good reasons for believing the claim. It guarantees that you have sold your belief for a fair price, and that it has not been filched from you. Being a responsible adult means accepting the fact that almost all knowledge is tentative, and accepting it cheerfully. You may be required to change your belief tomorrow, if the evidence warrants, and you should be willing and able to do so. That, in essence, is what skepticism means: to believe if and only if the evidence warrants. References Connor, John W. 1984. Misperception, folk belief, and the occult: A cognitive guide to understanding. SKEPTICAL INQUIRER, 8:344-354, Summer. Dingwall, E. J. 1985. The need for responsibility in parapsychology: My sixty years in psychical research. In A Skeptic's Handbook of Parapsychology, 161-174, ed. by Paul Kurtz. Buffalo, N Y. Prometheus Books. Hines, Terence. 1988. Pseudoscience and the Paranormal Buffalo, N.Y Prometheus Books. Hoebens, Piet Hein. 1981. Gerard Croiset: Investigation of the Mozart of "psychic sleuths." SKEPTICAL INQUIRER, 6(1):1728, Fall. -- -- -- . 1981-82. Croiset and Professor Tenhaeff Discrepancies in claims of clairvoyance. SKEPTICAL INQUIRER, (2):21-40, Winter. Hyman, Ray. 1985. A critical historical overview of parapsychology. In A Skeptic's Handbook of Parapsychology, 3-96, ed. by Paul Kurtz Buffalo, N.Y. Prometheus Books. Omohundro, John T. 1976. Von Däniken's chariots primer in the art of cooked science. SKEPTICAL INQUIRER, 1(1):58-68, Fall. Story, Ronald D. 1977 Von Däniken's golden gods, SKEPTICAL INQUIRER, 2(1):22-35, Fall/Winter. About the Author James Lett is a Professor of Anthropology, Department of Social Sciences, Indian River Community College, 3209 Virginia Avenue, Ft. Pierce, FL 34981. He is author of The Human Enterprise: A Critical Introduction to Anthropologcal Theory and Science, Reason, and Anthropology: The Principles of Rational Inquiry (1997, Rowman and Littlefield Publishers).

Evaluating a Company

Questions to answer before evaluating a company?

• What are the competitive advantages for the company? Does that advantage convert well as a moat around the company? Is it the leader in its industry? What is the product or service contributing to the company's success? Who are its competitors?
• Who is the major shareholder and what percent does she own? Is there buyback plan? Does the company buyback its share are a price with sensible value? How is the earnings being deployed?
• Is the company capital intensive? What is the Debt to Equity Ratio? 
• What is the Tangible Return of Equity? What is the average return of equity?
• Compare the inventory turnover with its competitors?

Vantage points for Evaluating a Company

Insights into Fundoo professors speech about Vantage point which talks about eight different views for evaluating a stock.

 He tells about the evaluation of stock of a company in a very simple way so that even a layman can understand.The basic idea behind his speech is that we should acquire the skill of looking at problems to solve or evaluate from different view points. This is easier said than done. But from his speech we could learn how to evaluate and recognize good companies from the bad. Not only that we can know how a value investor should wear the lens of different people with different viewpoints so that he could make a decision which is fail-safe.  

1. View point of an Business Analyst:
An Analyst's main concern is to find great businesses. He does so by finding if the company is capital intensive.A great business should uses less of fixed assets to generate more revenue,  have no interest bearing debt and have allocated its surplus capital in safe investments. He explains about the hidden moat in the negative working capital which is due to the excess of customers money in its books on which the company has to pay no interest.

The capital turnover ratio tells us how much return can we get on capital invested if we set a certain profit margin. A business can afford to have low margins and still earn high return of capital if it asset turnover is high. So one may find great business having low margins. This according to me is good finding as normally we might think that if the company earns a very low margin of say 5%, it is not good business. But what we miss is the return on capital invested which should be the main focus. We can find this by dividing the revenue by the total profit excluding other incomes which us the profit margin. Then multiplying this figure with the capital asset turnover would give us the return on capital.

2. View point of a Banker
A banker would like to evaluate how much he could lend to a worthy company. He would fix interest cover of three times the cash flow provided the business is stable. The loan amount would be less if the business is cyclic as the would expect an interest cover of more than 3 times.

3. View point of a Value Investor
A value investor would like to buy bits or whole of  business whose share price trades on or below the value which is the sum of the value  the banker would like to loan the company and the cash equivalents. This he see as a margin of safety for his investment. This part more important as we come to arrive at a fair value by finding the per share value of the total bankers loan added to the cash equivalent.

4. View point of a Bond manager

5. View point of a Leverage buyout buyer

6. View point of propronents of effecient market theory.

7. View point of value fund manager

8. View point of Society:
Society has a long term view of the effect of a business on its people and their well being. What is good for the shareholders might not be good for the society.