Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street Part 9

Notes.

Preface.

1 Josh Hamilton and Dan Reichl, "Buffett Has $2.1 Million Lunch Date with Hedge-Fund Manager," Josh Hamilton and Dan Reichl, "Buffett Has $2.1 Million Lunch Date with Hedge-Fund Manager," Bloomberg News, Bloomberg News, 28 June 2008. 28 June 2008.

2 Steven F. Hayward, Steven F. Hayward, Churchill on Leaders.h.i.+p Churchill on Leaders.h.i.+p (Rocklin, CA: Forum, 1997), 3. (Rocklin, CA: Forum, 1997), 3.

Chapter 1: An Unanswered Invitation.

1 Warren Buffett to Janet Tavakoli, letter, 6 June 2005. Warren Buffett to Janet Tavakoli, letter, 6 June 2005.

2 Ann C. Logue, "The Ca.s.sandra of Credit Derivatives," Ann C. Logue, "The Ca.s.sandra of Credit Derivatives," Business Week Chicago, Business Week Chicago, 28 January 2008. 28 January 2008.

3 Warren Buffett,"Shareholder Letter," Warren Buffett,"Shareholder Letter," Berks.h.i.+re Hathaway 2002 Annual Report, Berks.h.i.+re Hathaway 2002 Annual Report, 14. 14.

4 Ibid., 11. Ibid., 11.

5 Ibid., 13. Ibid., 13.

6 Ibid., 14. Ibid., 14.

7 Ibid., 15. Ibid., 15.

Chapter 2: Lunch with Warren.

1 Katherine Graham, Katherine Graham, Personal History Personal History (New York: Random House, 1997), 534. (New York: Random House, 1997), 534.

2 Ibid., 531. Ibid., 531.

3 Taesu Bynun, "IMDb Mini Biography for Dustin Hoffman," Taesu Bynun, "IMDb Mini Biography for Dustin Hoffman," Mndb.com, 2008. 2008.

4 Carol J. Loomis, "The Jones n.o.body Keeps Up With," Carol J. Loomis, "The Jones n.o.body Keeps Up With," Fortune, Fortune, April 1966. April 1966.

5 Benjamin Graham, Benjamin Graham, The Intelligent Investor The Intelligent Investor (New York : Harper & Row, 1973), 108. (New York : Harper & Row, 1973), 108.

6 Benoit Mandelbrot and Richard L. Hudson, Benoit Mandelbrot and Richard L. Hudson, The (Mis)Behavior of Markets The (Mis)Behavior of Markets (New York : Basic Books, 2004), 261. (New York : Basic Books, 2004), 261.

7 Based on the Yale Endowment Updates 1993-2007 and Berks.h.i.+re Hathaway historical daily share price data from Yahoo! Finance. Based on the Yale Endowment Updates 1993-2007 and Berks.h.i.+re Hathaway historical daily share price data from Yahoo! Finance.

8 Benjamin Graham, Benjamin Graham, The Intelligent Investor The Intelligent Investor (New York: Harper & Row, 1973), 277. (New York: Harper & Row, 1973), 277.

9 Ibid., 103. Ibid., 103.

10 Cifuentes Arturo, "CDOs and Their Ratings: Chronicle of a Foretold Disaster," Cifuentes Arturo, "CDOs and Their Ratings: Chronicle of a Foretold Disaster," Total Securitization, Total Securitization, 4 June 2007. 4 June 2007.

11 Brooke Masters, "Former Reagan Aide Charged with Fraud," Brooke Masters, "Former Reagan Aide Charged with Fraud," Financial Times, Financial Times, 26 March 2007. 26 March 2007.

12 Warren Buffett to Janet Tavakoli, e-mail correspondence, 27 August 2007. Warren Buffett to Janet Tavakoli, e-mail correspondence, 27 August 2007.

Chapter 3: The Prairie Princes versus the Princes of Darkness 1 Berks.h.i.+re Hathaway 2007 Annual Report, Berks.h.i.+re Hathaway 2007 Annual Report, 15. 15.

2 Julie Rannazzisi, "Coca-Cola to Expense Stock Options," Julie Rannazzisi, "Coca-Cola to Expense Stock Options," CBS Market.w.a.tch .com, CBS Market.w.a.tch .com, 14 July 2002. 14 July 2002.

3 Tom McGinty, "Fewer Investors Back Plans to Weigh in Executive Compensation," Tom McGinty, "Fewer Investors Back Plans to Weigh in Executive Compensation," Wall Street Journal, Wall Street Journal, 22 May 2008. 22 May 2008.

4 Janet Tavakoli, "FASB in Error on Options Valuation," Janet Tavakoli, "FASB in Error on Options Valuation," Financial Times, Financial Times, 5 April 2004. 5 April 2004.

5 Warren Buffett, "Fuzzy Math and Stock Options," Warren Buffett, "Fuzzy Math and Stock Options," Was.h.i.+ngton Post, Was.h.i.+ngton Post, 6 July 2004. 6 July 2004.

6 Mark Maremont, "Authorities Probe Improper Backdating of Options-Practice Allows Executives to Bolster Their Stock Gains; A Highly Beneficial Pattern, Mark Maremont, "Authorities Probe Improper Backdating of Options-Practice Allows Executives to Bolster Their Stock Gains; A Highly Beneficial Pattern, Wall Street Journal, Wall Street Journal, 11 November 2005. 11 November 2005.

7 Charles Forelle and James Bandler, "The Perfect Payday-Some CEOs Reap Millions by Landing Stock Options When They Are Most Valuable; Luck-or Something Else?" Charles Forelle and James Bandler, "The Perfect Payday-Some CEOs Reap Millions by Landing Stock Options When They Are Most Valuable; Luck-or Something Else?" Wall Street Journal, Wall Street Journal, 18 March 2006. 18 March 2006.

8 "Perfect Payday: Options Scorecard," "Perfect Payday: Options Scorecard," Wall Street Journal, Wall Street Journal, 4 September 2007. 4 September 2007.

9 Kip Hagopian, "Point of View: Expensing Employee Stock Options is Improper Accounting," Kip Hagopian, "Point of View: Expensing Employee Stock Options is Improper Accounting," California Management Review California Management Review 48 no. 4 (Summer 2006): 136-156. 48 no. 4 (Summer 2006): 136-156.

10 Holman W. Jenkins, Jr., "Stock Option Fiends Revealed," Holman W. Jenkins, Jr., "Stock Option Fiends Revealed," Wall Street Journal, Wall Street Journal, 30 August 2006. 30 August 2006.

11 Janet Tavakoli, "The Golden Fleece Award for Optional Integrity," Tavakoli Structured Finance, Inc. (client note), September 6, 2006. Janet Tavakoli, "The Golden Fleece Award for Optional Integrity," Tavakoli Structured Finance, Inc. (client note), September 6, 2006.

12 Janet Tavakoli, "The Golden Fleece Award for Optional Integrity," Janet Tavakoli, "The Golden Fleece Award for Optional Integrity," Lipper HedgeWorld, Lipper HedgeWorld, October 2, 2006 (printed with permission of Tavakoli Structured Finance, Inc., which retains the copyright). October 2, 2006 (printed with permission of Tavakoli Structured Finance, Inc., which retains the copyright).

13 Warren Buffett to Janet Tavakoli, e-mail correspondence, 2 October 2006. Warren Buffett to Janet Tavakoli, e-mail correspondence, 2 October 2006.

14 Kevin Allisonin, "HP's Dunn Charged With Conspiracy," Kevin Allisonin, "HP's Dunn Charged With Conspiracy," Financial Times, Financial Times, 5 October 2006. 5 October 2006.

15 Warren Buffett, memo of September 27 was published in the Warren Buffett, memo of September 27 was published in the Financial Times Financial Times on October 9, 2008. It was sent to me six days after Buffett sent it to his managers. on October 9, 2008. It was sent to me six days after Buffett sent it to his managers.

16 Ibid. Ibid.

17 Floyd Norris, "The 1994 Honor Roll (of Sorts)," Floyd Norris, "The 1994 Honor Roll (of Sorts)," New York Times, New York Times, 25 December 1994. 25 December 1994.

18 Benjamin Graham, Benjamin Graham, The Intelligent Investor The Intelligent Investor (New York: Harper & Row, 1973), 96. (New York: Harper & Row, 1973), 96.

Chapter 4: The Insatiable Curiosity to Know Nothing Worth Knowing (Oscar Wilde Was Right) 1 Anita Raghavan and Mitch.e.l.l Pacelle, "Buffett Has Renewed His Talks to Acquire Long-Term Capital," Anita Raghavan and Mitch.e.l.l Pacelle, "Buffett Has Renewed His Talks to Acquire Long-Term Capital," Wall Street Journal, Wall Street Journal, 27 October 1998. 27 October 1998.

2 Roger Lowenstein, Roger Lowenstein, When Genius Failed When Genius Failed (New York: HarperCollins, 2002), 128-129, 224-225. (New York: HarperCollins, 2002), 128-129, 224-225.

3 Claudia H. Deutsch, "Edson Mitch.e.l.l Dies at 47, Executive of Deutsche Bank," Claudia H. Deutsch, "Edson Mitch.e.l.l Dies at 47, Executive of Deutsche Bank," New York Times, New York Times, 26 December 2001. Edson Mitch.e.l.l died in 2001 at the age of 47, after the twin-engine Beechcraft flying him to Rangeley, Maine to join his ex-wife and his children for the holidays, crashed into a mountain. He had left Merrill Lynch in 1995 to run global markets at Deutsche Bank. 26 December 2001. Edson Mitch.e.l.l died in 2001 at the age of 47, after the twin-engine Beechcraft flying him to Rangeley, Maine to join his ex-wife and his children for the holidays, crashed into a mountain. He had left Merrill Lynch in 1995 to run global markets at Deutsche Bank.

4 Anita Raghavan, "Long-Term Capital's Partners Got Big Loans to Invest in Fund," Anita Raghavan, "Long-Term Capital's Partners Got Big Loans to Invest in Fund," Wall Street Journal, Wall Street Journal, 6 October 1998. 6 October 1998.

5 "A Top Trader Quits Salomon," "A Top Trader Quits Salomon," New York Times, New York Times, 22 December 1994. Hufschmid was head of Foreign Exchange at Salomon in 1993; his foreign exchange trading group reportedly made more than $200 million. 22 December 1994. Hufschmid was head of Foreign Exchange at Salomon in 1993; his foreign exchange trading group reportedly made more than $200 million.

6 Edward Wyatt, "Profits of Hedge Fund Insiders Appear to Be Off but Still Big," Edward Wyatt, "Profits of Hedge Fund Insiders Appear to Be Off but Still Big," NewYork Times, NewYork Times, 26 September 1998. 26 September 1998.

7 Sandra Hernandez, "Two-Year Notes Have Biggest Weekly Decline in 2008 on Fed Cut," Sandra Hernandez, "Two-Year Notes Have Biggest Weekly Decline in 2008 on Fed Cut," Bloomberg News, Bloomberg News, 21 March 2008. 21 March 2008.

8 Gregory Zuckerman, "Shakeout Roils Hedge-Fund World," Gregory Zuckerman, "Shakeout Roils Hedge-Fund World," Wall Street Journal, Wall Street Journal, 17 June 2008. Estimates varied from as low as 6,000 to 8,500 globally, depending on who was counting. That number does not include managed offsh.o.r.e ent.i.ties that looked a lot like hedge funds but are called by a variety of structured finance labels, 17 June 2008. Estimates varied from as low as 6,000 to 8,500 globally, depending on who was counting. That number does not include managed offsh.o.r.e ent.i.ties that looked a lot like hedge funds but are called by a variety of structured finance labels, structured investment vehicles structured investment vehicles (SIVs), and (SIVs), and special purpose acquisition vehicles special purpose acquisition vehicles (s.p.a.cs). Many of them invest in leveraged bets on tranches of collateralized debt obligations. (s.p.a.cs). Many of them invest in leveraged bets on tranches of collateralized debt obligations.

9 Gregory Zuckerman, "Shakeout Roils Hedge-Fund World," Gregory Zuckerman, "Shakeout Roils Hedge-Fund World," Wall Street Journal, Wall Street Journal, 17 June 2008. 17 June 2008.

10 Josh Hamilton, "Warren Buffett's Berks.h.i.+re Salary Remains $100,000," Josh Hamilton, "Warren Buffett's Berks.h.i.+re Salary Remains $100,000," Bloomberg News, Bloomberg News, 17 March 2008. 17 March 2008.

11 Jenny Strasburg, "Tudor Investors Pull More than $1 Billion from Raptor," Jenny Strasburg, "Tudor Investors Pull More than $1 Billion from Raptor," Bloomberg News, Bloomberg News, 14 December 2007. 14 December 2007.

12 Carrick Mollenkamp and Ian McDonald, "SEC Plumbs Money Firm's Files," Carrick Mollenkamp and Ian McDonald, "SEC Plumbs Money Firm's Files," Wall Street Journal, Wall Street Journal, 24 March 2006. 24 March 2006.

13 Kenneth M. Krys and Christopher Stride, et. al. v. Christopher Sugrue, Mark Kavanagh, et al. Kenneth M. Krys and Christopher Stride, et. al. v. Christopher Sugrue, Mark Kavanagh, et al. Supreme Court of the State of New York, County of New York, Index No. 08600653, filed May 5, 2008. Supreme Court of the State of New York, County of New York, Index No. 08600653, filed May 5, 2008.

14 Greg Newton,"Serve Him Right: SPhinX Liquidators Sue Angolan Resident," Greg Newton,"Serve Him Right: SPhinX Liquidators Sue Angolan Resident," Naked Shorts, Naked Shorts, 3 April 2008. 3 April 2008.

15 See note 13 in Chapter 3. See note 13 in Chapter 3.

16 W. W. Meissner, S.J., M.D. W. W. Meissner, S.J., M.D. Ignatius of Loyola: The Psychology of a Saint Ignatius of Loyola: The Psychology of a Saint (New Haven:Yale University Press, 1992), 26. (New Haven:Yale University Press, 1992), 26.

17 Gary Belsky, and Thomas Gilovich, Gary Belsky, and Thomas Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them Why Smart People Make Big Money Mistakes and How to Correct Them (New York : Fireside, 1999), 118. (New York : Fireside, 1999), 118.

18 Lowenstein, Lowenstein, When Genius Failed, When Genius Failed, 123. 123.

19 Berks.h.i.+re Hathaway 2007 Annual Report. Berks.h.i.+re Hathaway 2007 Annual Report. 17. 17.

20 Na.s.sim Taleb, Na.s.sim Taleb, Fooled by Randomness Fooled by Randomness (New York : Random House, 2001) xxvi. Emphasis in original. (New York : Random House, 2001) xxvi. Emphasis in original.

21 Janet Tavakoli,"Dead Man's Curve," Janet Tavakoli,"Dead Man's Curve," Client Note, Client Note, 21 September 2006. A longer version of this client note was published in 21 September 2006. A longer version of this client note was published in HedgeWorld.com, 22 September 2006 (printed with permission of TSF, which retains the copyright). The following is an excerpt for those interested in more detail: 22 September 2006 (printed with permission of TSF, which retains the copyright). The following is an excerpt for those interested in more detail: If we use the model for a normal (Gaussian) distribution, a five-standard deviation credit event should only happen once in every 7,000 years. But in the market place, we see this happen once or twice in a decade. Amaranth was short fall natural gas futures contracts and long winter natural gas futures contracts in sequential years from 2006 through 2009, among other trades. But just as too much money flowing into these trades can collapse spreads in the treasury market, too much leveraged money flowing into the much thinner commodities market undid Amaranth's trades. Spreads tightened by five to ten standard deviations in the September/December natural gas spreads depending on which time period you use for your data. In September, Amaranth lost more than half of its value, skidding from $9 billion to only $3 billion in a.s.sets (according to the Wall Street Journal) Wall Street Journal) having put on the cla.s.sic "Dead Man's Curve" trade. These trades don't follow a normal curve or even a historical spread pattern, and even if historical patterns eventually return, in the meantime, one is merely "dead" right. having put on the cla.s.sic "Dead Man's Curve" trade. These trades don't follow a normal curve or even a historical spread pattern, and even if historical patterns eventually return, in the meantime, one is merely "dead" right.

22 Warren Buffett to Janet Tavakoli, e-mail correspondence, 27 September 2006. Warren Buffett to Janet Tavakoli, e-mail correspondence, 27 September 2006.

23 Ianthe Jeanne Dugan, "Failed Hedge Fund Haunts Celebrities," Ianthe Jeanne Dugan, "Failed Hedge Fund Haunts Celebrities," Wall Street Journal, Wall Street Journal, 22 August 2006. 22 August 2006.

24 Richard Esposito, "Police Investigating Possible Suicide by Hedge Fund Cheat," Richard Esposito, "Police Investigating Possible Suicide by Hedge Fund Cheat," ABC News, ABC News, 9 June 2008. 9 June 2008.

25 Ibid. Ibid.

26 Greg Newton,"Surfacing Scammy," Greg Newton,"Surfacing Scammy," Naked Shorts, Naked Shorts, 10 June 2008. 10 June 2008.

27 Ianthe Jeanne Dugan, "Manhunt is Launched for Trader in Big Fraud," Ianthe Jeanne Dugan, "Manhunt is Launched for Trader in Big Fraud," Wall Street Journal, Wall Street Journal, 11 June, 2008. 11 June, 2008.

28 Ibid. Ibid.

29 Greg Newton,"Show Me the Corpse!" Greg Newton,"Show Me the Corpse!" Naked Shorts, Naked Shorts, 9 June 2008. 9 June 2008.

30 Carlyn Kolker and David Glovin, "Bayou's Samuel Israel to Forfeit Bail, Begins 20-Year Sentence, Carlyn Kolker and David Glovin, "Bayou's Samuel Israel to Forfeit Bail, Begins 20-Year Sentence, Bloomberg News, Bloomberg News, 3 July 2008. 3 July 2008.

31 Christian Boone and Bill Rankin, "Marietta Man in Hedge Fund Fraud Commits Suicide," Christian Boone and Bill Rankin, "Marietta Man in Hedge Fund Fraud Commits Suicide," Atlanta Journal-Const.i.tution, Atlanta Journal-Const.i.tution, 25 May 2008. 25 May 2008.

32 D. H. Lawrence, "The Rocking Horse Winner," in D. H. Lawrence, "The Rocking Horse Winner," in The Woman who Rode Away and Other Stories The Woman who Rode Away and Other Stories (1928), edited by Dieter Mehl and Christa Jansohn (Cambridge, U.K.: Cambridge University Press, 1995) 230-243. (1928), edited by Dieter Mehl and Christa Jansohn (Cambridge, U.K.: Cambridge University Press, 1995) 230-243.

33 Benjamin Graham, Benjamin Graham, The Intelligent Investor The Intelligent Investor New York: Harper & Row, 1973), 98. New York: Harper & Row, 1973), 98.

34 Richard Heckinger to Janet Tavakoli, e-mail correspondence, 22 August 2006. Heckinger is now the senior policy advisor in the Financial Markets Group of the Federal Reserve Bank of Chicago. Richard Heckinger to Janet Tavakoli, e-mail correspondence, 22 August 2006. Heckinger is now the senior policy advisor in the Financial Markets Group of the Federal Reserve Bank of Chicago.

35 Gregory Zuckerman, "Shakeout Roils Hedge-Fund World," Gregory Zuckerman, "Shakeout Roils Hedge-Fund World," Wall Street Journal, Wall Street Journal, 17 June 2008. The calculations on the number of hedge funds controlling a.s.sets is from Tavakoli Structured Finance Inc. based on market share data from Hedge Fund Research, Inc. sourced in this article. 17 June 2008. The calculations on the number of hedge funds controlling a.s.sets is from Tavakoli Structured Finance Inc. based on market share data from Hedge Fund Research, Inc. sourced in this article.

36 Tom Cahill, "HFR Hedge Fund Index Rebounds in April after Decline in March," Tom Cahill, "HFR Hedge Fund Index Rebounds in April after Decline in March," Bloomberg News, Bloomberg News, 30 April 2008. 30 April 2008.

37 Matthew Lynn, "Hedge Funds Come Unstuck on Truth-Twisting, Lies," Matthew Lynn, "Hedge Funds Come Unstuck on Truth-Twisting, Lies," Bloomberg News, Bloomberg News, 9 April 2008. 9 April 2008.

38 Tom Cahill, "Hedge Fund Outlook Is 'Much Worse' Than 1998, LTCM Veteran Says," Tom Cahill, "Hedge Fund Outlook Is 'Much Worse' Than 1998, LTCM Veteran Says," Bloomberg News, Bloomberg News, 8 August 2008. Hans Hufschmid became the chief executive officer of GlobeOp Financial Services LP. 8 August 2008. Hans Hufschmid became the chief executive officer of GlobeOp Financial Services LP.

39 Neil Weinberg and Bernard Condon, "The Sleaziest Show on Earth," Neil Weinberg and Bernard Condon, "The Sleaziest Show on Earth," Forbes, Forbes, 24 May 2004. 24 May 2004.

40 Ibid. Ibid.

41 Ralph Cioffi (former managing director of Bear Stearns a.s.set Management) in a conversation with author, 30 March 2006. (This is not proprietary information). Ralph Cioffi (former managing director of Bear Stearns a.s.set Management) in a conversation with author, 30 March 2006. (This is not proprietary information).

42 Berks.h.i.+re Hathaway Inc. 2007 Annual Report, Berks.h.i.+re Hathaway Inc. 2007 Annual Report, 17. 17.