The following article was initially published in 1997. It is in part based on the work of William Blum. Killing Hope: U.S. Military and CIA Interventions since World War II, 1995 (GR Ed. M. Ch.) submitted by
By Steve Kangas
The following timeline describes just a few of the hundreds of atrocities and crimes committed by the CIA. (1)
CIA operations follow the same recurring script. First, American business interests abroad are threatened by a popular or democratically elected leader. The people support their leader because he intends to conduct land reform, strengthen unions, redistribute wealth, nationalize foreign-owned industry, and regulate business to protect workers, consumers and the environment. So, on behalf of American business, and often with their help, the CIA mobilizes the opposition. First it identifies right-wing groups within the country (usually the military), and offers them a deal: “We’ll put you in power if you maintain a favorable business climate for us.”
The Agency then hires, trains and works with them to overthrow the existing government (usually a democracy). It uses every trick in the book: propaganda, stuffed ballot boxes, purchased elections, extortion, blackmail, sexual intrigue, false stories about opponents in the local media, infiltration and disruption of opposing political parties, kidnapping, beating, torture, intimidation, economic sabotage, death squads and even assassination. These efforts culminate in a military coup, which installs a right-wing dictator.
The CIA trains the dictator’s security apparatus to crack down on the traditional enemies of big business, using interrogation, torture and murder. The victims are said to be “communists,” but almost always they are just peasants, liberals, moderates, labor union leaders, political opponents and advocates of free speech and democracy. Widespread human rights abuses follow.
This scenario has been repeated so many times that the CIA actually teaches it in a special school, the notorious “School of the Americas.” (It opened in Panama but later moved to Fort Benning, Georgia.) Critics have nicknamed it the “School of the Dictators” and “School of the Assassins.” Here, the CIA trains Latin American military officers how to conduct coups, including the use of interrogation, torture and murder.
The Association for Responsible Dissent estimates that by 1987, 6 million people had died as a result of CIA covert operations. (2) Former State Department official William Blum correctly calls this an “American Holocaust.”
The CIA justifies these actions as part of its war against communism. But most coups do not involve a communist threat. Unlucky nations are targeted for a wide variety of reasons: not only threats to American business interests abroad, but also liberal or even moderate social reforms, political instability, the unwillingness of a leader to carry out Washington’s dictates, and declarations of neutrality in the Cold War. Indeed, nothing has infuriated CIA Directors quite like a nation’s desire to stay out of the Cold War.
The ironic thing about all this intervention is that it frequently fails to achieve American objectives. Often the newly installed dictator grows comfortable with the security apparatus the CIA has built for him. He becomes an expert at running a police state. And because the dictator knows he cannot be overthrown, he becomes independent and defiant of Washington’s will. The CIA then finds it cannot overthrow him, because the police and military are under the dictator’s control, afraid to cooperate with American spies for fear of torture and execution. The only two options for the U.S at this point are impotence or war. Examples of this “boomerang effect” include the Shah of Iran, General Noriega and Saddam Hussein. The boomerang effect also explains why the CIA has proven highly successful at overthrowing democracies, but a wretched failure at overthrowing dictatorships.
The following timeline should confirm that the CIA as we know it should be abolished and replaced by a true information-gathering and analysis organization. The CIA cannot be reformed — it is institutionally and culturally corrupt.
The culture we lost — Secretary of State Henry Stimson refuses to endorse a code-breaking operation, saying, “Gentlemen do not read each other’s mail.”
COI created — In preparation for World War II, President Roosevelt creates the Office of Coordinator of Information (COI). General William “Wild Bill” Donovan heads the new intelligence service.
OSS created — Roosevelt restructures COI into something more suitable for covert action, the Office of Strategic Services (OSS). Donovan recruits so many of the nation’s rich and powerful that eventually people joke that “OSS” stands for “Oh, so social!” or “Oh, such snobs!”
Italy — Donovan recruits the Catholic Church in Rome to be the center of Anglo-American spy operations in Fascist Italy. This would prove to be one of America’s most enduring intelligence alliances in the Cold War.
OSS is abolished — The remaining American information agencies cease covert actions and return to harmless information gathering and analysis.
Operation PAPERCLIP – While other American agencies are hunting down Nazi war criminals for arrest, the U.S. intelligence community is smuggling them into America, unpunished, for their use against the Soviets. The most important of these is Reinhard Gehlen, Hitler’s master spy who had built up an intelligence network in the Soviet Union. With full U.S. blessing, he creates the “Gehlen Organization,” a band of refugee Nazi spies who reactivate their networks in Russia.
These include SS intelligence officers Alfred Six and Emil Augsburg (who massacred Jews in the Holocaust), Klaus Barbie (the “Butcher of Lyon”), Otto von Bolschwing (the Holocaust mastermind who worked with Eichmann) and SS Colonel Otto Skorzeny (a personal friend of Hitler’s). The Gehlen Organization supplies the U.S. with its only intelligence on the Soviet Union for the next ten years, serving as a bridge between the abolishment of the OSS and the creation of the CIA. However, much of the “intelligence” the former Nazis provide is bogus. Gehlen inflates Soviet military capabilities at a time when Russia is still rebuilding its devastated society, in order to inflate his own importance to the Americans (who might otherwise punish him). In 1948, Gehlen almost convinces the Americans that war is imminent, and the West should make a preemptive strike. In the 50s he produces a fictitious “missile gap.” To make matters worse, the Russians have thoroughly penetrated the Gehlen Organization with double agents, undermining the very American security that Gehlen was supposed to protect.
Greece — President Truman requests military aid to Greece to support right-wing forces fighting communist rebels. For the rest of the Cold War, Washington and the CIA will back notorious Greek leaders with deplorable human rights records.
CIA created — President Truman signs the National Security Act of 1947, creating the Central Intelligence Agency and National Security Council. The CIA is accountable to the president through the NSC — there is no democratic or congressional oversight. Its charter allows the CIA to “perform such other functions and duties… as the National Security Council may from time to time direct.” This loophole opens the door to covert action and dirty tricks.
Covert-action wing created — The CIA recreates a covert action wing, innocuously called the Office of Policy Coordination, led by Wall Street lawyer Frank Wisner. According to its secret charter, its responsibilities include “propaganda, economic warfare, preventive direct action, including sabotage, antisabotage, demolition and evacuation procedures; subversion against hostile states, including assistance to underground resistance groups, and support of indigenous anti-communist elements in threatened countries of the free world.”
Italy — The CIA corrupts democratic elections in Italy, where Italian communists threaten to win the elections. The CIA buys votes, broadcasts propaganda, threatens and beats up opposition leaders, and infiltrates and disrupts their organizations. It works — the communists are defeated.
Radio Free Europe — The CIA creates its first major propaganda outlet, Radio Free Europe. Over the next several decades, its broadcasts are so blatantly false that for a time it is considered illegal to publish transcripts of them in the U.S.
Operation MOCKINGBIRD — The CIA begins recruiting American news organizations and journalists to become spies and disseminators of propaganda. The effort is headed by Frank Wisner, Allan Dulles, Richard Helms and Philip Graham. Graham is publisher of The Washington Post, which becomes a major CIA player. Eventually, the CIA’s media assets will include ABC, NBC, CBS, Time, Newsweek, Associated Press, United Press International, Reuters, Hearst Newspapers, Scripps-Howard, Copley News Service and more. By the CIA’s own admission, at least 25 organizations and 400 journalists will become CIA assets.
Iran – CIA overthrows the democratically elected Mohammed Mossadegh in a military coup, after he threatened to nationalize British oil. The CIA replaces him with a dictator, the Shah of Iran, whose secret police, SAVAK, is as brutal as the Gestapo.
Operation MK-ULTRA — Inspired by North Korea’s brainwashing program, the CIA begins experiments on mind control. The most notorious part of this project involves giving LSD and other drugs to American subjects without their knowledge or against their will, causing several to commit suicide. However, the operation involves far more than this. Funded in part by the Rockefeller and Ford foundations, research includes propaganda, brainwashing, public relations, advertising, hypnosis, and other forms of suggestion.
Guatemala — CIA overthrows the democratically elected Jacob Arbenz in a military coup. Arbenz has threatened to nationalize the Rockefeller-owned United Fruit Company, in which CIA Director Allen Dulles also owns stock. Arbenz is replaced with a series of right-wing dictators whose bloodthirsty policies will kill over 100,000 Guatemalans in the next 40 years.
North Vietnam — CIA officer Edward Lansdale spends four years trying to overthrow the communist government of North Vietnam, using all the usual dirty tricks. The CIA also attempts to legitimize a tyrannical puppet regime in South Vietnam, headed by Ngo Dinh Diem. These efforts fail to win the hearts and minds of the South Vietnamese because the Diem government is opposed to true democracy, land reform and poverty reduction measures. The CIA’s continuing failure results in escalating American intervention, culminating in the Vietnam War.
Hungary — Radio Free Europe incites Hungary to revolt by broadcasting Khruschev’s Secret Speech, in which he denounced Stalin. It also hints that American aid will help the Hungarians fight. This aid fails to materialize as Hungarians launch a doomed armed revolt, which only invites a major Soviet invasion. The conflict kills 7,000 Soviets and 30,000 Hungarians.
Laos — The CIA carries out approximately one coup per year trying to nullify Laos’ democratic elections. The problem is the Pathet Lao, a leftist group with enough popular support to be a member of any coalition government. In the late 50s, the CIA even creates an “Armee Clandestine” of Asian mercenaries to attack the Pathet Lao. After the CIA’s army suffers numerous defeats, the U.S. starts bombing, dropping more bombs on Laos than all the U.S. bombs dropped in World War II. A quarter of all Laotians will eventually become refugees, many living in caves.
Haiti — The U.S. military helps “Papa Doc” Duvalier become dictator of Haiti. He creates his own private police force, the “Tonton Macoutes,” who terrorize the population with machetes.
They will kill over 100,000 during the Duvalier family reign. The U.S. does not protest their dismal human rights record.
The Bay of Pigs — The CIA sends 1,500 Cuban exiles to invade Castro’s Cuba. But “Operation Mongoose” fails, due to poor planning, security and backing. The planners had imagined that the invasion will spark a popular uprising against Castro -– which never happens. A promised American air strike also never occurs. This is the CIA’s first public setback, causing President Kennedy to fire CIA Director Allen Dulles.
Dominican Republic — The CIA assassinates Rafael Trujillo, a murderous dictator Washington has supported since 1930. Trujillo’s business interests have grown so large (about 60 percent of the economy) that they have begun competing with American business interests.
Ecuador — The CIA-backed military forces the democratically elected President Jose Velasco to resign. Vice President Carlos Arosemana replaces him; the CIA fills the now vacant vice presidency with its own man.
Congo (Zaire) — The CIA assassinates the democratically elected Patrice Lumumba. However, public support for Lumumba’s politics runs so high that the CIA cannot clearly install his opponents in power. Four years of political turmoil follow.
Dominican Republic — The CIA overthrows the democratically elected Juan Bosch in a military coup. The CIA installs a repressive, right-wing junta.
Ecuador — A CIA-backed military coup overthrows President Arosemana, whose independent (not socialist) policies have become unacceptable to Washington. A military junta assumes command, cancels the 1964 elections, and begins abusing human rights.
Brazil — A CIA-backed military coup overthrows the democratically elected government of Joao Goulart. The junta that replaces it will, in the next two decades, become one of the most bloodthirsty in history. General Castelo Branco will create Latin America’s first death squads, or bands of secret police who hunt down “communists” for torture, interrogation and murder. Often these “communists” are no more than Branco’s political opponents. Later it is revealed that the CIA trains the death squads.
Indonesia — The CIA overthrows the democratically elected Sukarno with a military coup. The CIA has been trying to eliminate Sukarno since 1957, using everything from attempted assassination to sexual intrigue, for nothing more than his declaring neutrality in the Cold War. His successor, General Suharto, will massacre between 500,000 to 1 million civilians accused of being “communist.” The CIA supplies the names of countless suspects.
Dominican Republic — A popular rebellion breaks out, promising to reinstall Juan Bosch as the country’s elected leader. The revolution is crushed when U.S. Marines land to uphold the military regime by force. The CIA directs everything behind the scenes.
Greece — With the CIA’s backing, the king removes George Papandreous as prime minister. Papandreous has failed to vigorously support U.S. interests in Greece.
Congo (Zaire) — A CIA-backed military coup installs Mobutu Sese Seko as dictator. The hated and repressive Mobutu exploits his desperately poor country for billions.
The Ramparts Affair — The radical magazine Ramparts begins a series of unprecedented anti-CIA articles. Among their scoops: the CIA has paid the University of Michigan $25 million dollars to hire “professors” to train South Vietnamese students in covert police methods. MIT and other universities have received similar payments. Ramparts also reveals that the National Students’ Association is a CIA front. Students are sometimes recruited through blackmail and bribery, including draft deferments.
Greece — A CIA-backed military coup overthrows the government two days before the elections. The favorite to win was George Papandreous, the liberal candidate. During the next six years, the “reign of the colonels” — backed by the CIA — will usher in the widespread use of torture and murder against political opponents. When a Greek ambassador objects to President Johnson about U.S. plans for Cyprus, Johnson tells him: “Fuck your parliament and your constitution.”
Operation PHEONIX — The CIA helps South Vietnamese agents identify and then murder alleged Viet Cong leaders operating in South Vietnamese villages. According to a 1971 congressional report, this operation killed about 20,000 “Viet Cong.”
Operation CHAOS — The CIA has been illegally spying on American citizens since 1959, but with Operation CHAOS, President Johnson dramatically boosts the effort. CIA agents go undercover as student radicals to spy on and disrupt campus organizations protesting the Vietnam War. They are searching for Russian instigators, which they never find. CHAOS will eventually spy on 7,000 individuals and 1,000 organizations.
Bolivia — A CIA-organized military operation captures legendary guerilla Che Guevara. The CIA wants to keep him alive for interrogation, but the Bolivian government executes him to prevent worldwide calls for clemency.
Uruguay — The notorious CIA torturer Dan Mitrione arrives in Uruguay, a country torn with political strife. Whereas right-wing forces previously used torture only as a last resort, Mitrione convinces them to use it as a routine, widespread practice. “The precise pain, in the precise place, in the precise amount, for the desired effect,” is his motto. The torture techniques he teaches to the death squads rival the Nazis’. He eventually becomes so feared that revolutionaries will kidnap and murder him a year later.
Cambodia — The CIA overthrows Prince Sahounek, who is highly popular among Cambodians for keeping them out of the Vietnam War. He is replaced by CIA puppet Lon Nol, who immediately throws Cambodian troops into battle. This unpopular move strengthens once minor opposition parties like the Khmer Rouge, which achieves power in 1975 and massacres millions of its own people.
Bolivia — After half a decade of CIA-inspired political turmoil, a CIA-backed military coup overthrows the leftist President Juan Torres. In the next two years, dictator Hugo Banzer will have over 2,000 political opponents arrested without trial, then tortured, raped and executed.
Haiti — “Papa Doc” Duvalier dies, leaving his 19-year old son “Baby Doc” Duvalier the dictator of Haiti. His son continues his bloody reign with full knowledge of the CIA.
The Case-Zablocki Act — Congress passes an act requiring congressional review of executive agreements. In theory, this should make CIA operations more accountable. In fact, it is only marginally effective.
Cambodia — Congress votes to cut off CIA funds for its secret war in Cambodia.
Wagergate Break-in — President Nixon sends in a team of burglars to wiretap Democratic offices at Watergate. The team members have extensive CIA histories, including James McCord, E. Howard Hunt and five of the Cuban burglars. They work for the Committee to Reelect the President (CREEP), which does dirty work like disrupting Democratic campaigns and laundering Nixon’s illegal campaign contributions. CREEP’s activities are funded and organized by another CIA front, the Mullen Company.
Chile — The CIA overthrows and assassinates Salvador Allende, Latin America’s first democratically elected socialist leader. The problems begin when Allende nationalizes American-owned firms in Chile. ITT offers the CIA $1 million for a coup (reportedly refused). The CIA replaces Allende with General Augusto Pinochet, who will torture and murder thousands of his own countrymen in a crackdown on labor leaders and the political left.
CIA begins internal investigations — William Colby, the Deputy Director for Operations, orders all CIA personnel to report any and all illegal activities they know about. This information is later reported to Congress.
Watergate Scandal — The CIA’s main collaborating newspaper in America, The Washington Post, reports Nixon’s crimes long before any other newspaper takes up the subject. The two reporters, Woodward and Bernstein, make almost no mention of the CIA’s many fingerprints all over the scandal. It is later revealed that Woodward was a Naval intelligence briefer to the White House, and knows many important intelligence figures, including General Alexander Haig. His main source, “Deep Throat,” is probably one of those.
CIA Director Helms Fired — President Nixon fires CIA Director Richard Helms for failing to help cover up the Watergate scandal. Helms and Nixon have always disliked each other. The new CIA director is William Colby, who is relatively more open to CIA reform.
CHAOS exposed — Pulitzer prize winning journalist Seymour Hersh publishes a story about Operation CHAOS, the domestic surveillance and infiltration of anti-war and civil rights groups in the U.S. The story sparks national outrage.
Angleton fired — Congress holds hearings on the illegal domestic spying efforts of James Jesus Angleton, the CIA’s chief of counterintelligence. His efforts included mail-opening campaigns and secret surveillance of war protesters. The hearings result in his dismissal from the CIA.
House clears CIA in Watergate — The House of Representatives clears the CIA of any complicity in Nixon’s Watergate break-in.
The Hughes Ryan Act — Congress passes an amendment requiring the president to report nonintelligence CIA operations to the relevant congressional committees in a timely fashion.
Australia — The CIA helps topple the democratically elected, left-leaning government of Prime Minister Edward Whitlam. The CIA does this by giving an ultimatum to its Governor-General, John Kerr. Kerr, a longtime CIA collaborator, exercises his constitutional right to dissolve the Whitlam government. The Governor-General is a largely ceremonial position appointed by the Queen; the Prime Minister is democratically elected. The use of this archaic and never-used law stuns the nation.
Angola — Eager to demonstrate American military resolve after its defeat in Vietnam, Henry Kissinger launches a CIA-backed war in Angola. Contrary to Kissinger’s assertions, Angola is a country of little strategic importance and not seriously threatened by communism. The CIA backs the brutal leader of UNITAS, Jonas Savimbi. This polarizes Angolan politics and drives his opponents into the arms of Cuba and the Soviet Union for survival. Congress will cut off funds in 1976, but the CIA is able to run the war off the books until 1984, when funding is legalized again. This entirely pointless war kills over 300,000 Angolans.
“The CIA and the Cult of Intelligence” — Victor Marchetti and John Marks publish this whistle-blowing history of CIA crimes and abuses. Marchetti has spent 14 years in the CIA, eventually becoming an executive assistant to the Deputy Director of Intelligence. Marks has spent five years as an intelligence official in the State Department.
“Inside the Company” — Philip Agee publishes a diary of his life inside the CIA. Agee has worked in covert operations in Latin America during the 60s, and details the crimes in which he took part.
Congress investigates CIA wrong-doing — Public outrage compels Congress to hold hearings on CIA crimes. Senator Frank Church heads the Senate investigation (“The Church Committee”), and Representative Otis Pike heads the House investigation. (Despite a 98 percent incumbency reelection rate, both Church and Pike are defeated in the next elections.) The investigations lead to a number of reforms intended to increase the CIA’s accountability to Congress, including the creation of a standing Senate committee on intelligence. However, the reforms prove ineffective, as the Iran/Contra scandal will show. It turns out the CIA can control, deal with or sidestep Congress with ease.
The Rockefeller Commission — In an attempt to reduce the damage done by the Church Committee, President Ford creates the “Rockefeller Commission” to whitewash CIA history and propose toothless reforms. The commission’s namesake, Vice President Nelson Rockefeller, is himself a major CIA figure. Five of the commission’s eight members are also members of the Council on Foreign Relations, a CIA-dominated organization.
Iran — The CIA fails to predict the fall of the Shah of Iran, a longtime CIA puppet, and the rise of Muslim fundamentalists who are furious at the CIA’s backing of SAVAK, the Shah’s bloodthirsty secret police. In revenge, the Muslims take 52 Americans hostage in the U.S. embassy in Tehran.
Afghanistan — The Soviets invade Afghanistan. The CIA immediately begins supplying arms to any faction willing to fight the occupying Soviets. Such indiscriminate arming means that when the Soviets leave Afghanistan, civil war will erupt. Also, fanatical Muslim extremists now possess state-of-the-art weaponry. One of these is Sheik Abdel Rahman, who will become involved in the World Trade Center bombing in New York.
El Salvador — An idealistic group of young military officers, repulsed by the massacre of the poor, overthrows the right-wing government. However, the U.S. compels the inexperienced officers to include many of the old guard in key positions in their new government. Soon, things are back to “normal” — the military government is repressing and killing poor civilian protesters. Many of the young military and civilian reformers, finding themselves powerless, resign in disgust.
Nicaragua — Anastasios Samoza II, the CIA-backed dictator, falls. The Marxist Sandinistas take over government, and they are initially popular because of their commitment to land and anti-poverty reform. Samoza had a murderous and hated personal army called the National Guard. Remnants of the Guard will become the Contras, who fight a CIA-backed guerilla war against the Sandinista government throughout the 1980s.
El Salvador — The Archbishop of San Salvador, Oscar Romero, pleads with President Carter “Christian to Christian” to stop aiding the military government slaughtering his people. Carter refuses. Shortly afterwards, right-wing leader Roberto D’Aubuisson has Romero shot through the heart while saying Mass. The country soon dissolves into civil war, with the peasants in the hills fighting against the military government. The CIA and U.S. Armed Forces supply the government with overwhelming military and intelligence superiority. CIA-trained death squads roam the countryside, committing atrocities like that of El Mazote in 1982, where they massacre between 700 and 1000 men, women and children. By 1992, some 63,000 Salvadorans will be killed.
Iran/Contra Begins — The CIA begins selling arms to Iran at high prices, using the profits to arm the Contras fighting the Sandinista government in Nicaragua. President Reagan vows that the Sandinistas will be “pressured” until “they say ‘uncle.’” The CIA’s Freedom Fighter’s Manual disbursed to the Contras includes instruction on economic sabotage, propaganda, extortion, bribery, blackmail, interrogation, torture, murder and political assassination.
Honduras — The CIA gives Honduran military officers the Human Resource Exploitation Training Manual – 1983, which teaches how to torture people. Honduras’ notorious “Battalion 316” then uses these techniques, with the CIA’s full knowledge, on thousands of leftist dissidents. At least 184 are murdered.
The Boland Amendment — The last of a series of Boland Amendments is passed. These amendments have reduced CIA aid to the Contras; the last one cuts it off completely. However, CIA Director William Casey is already prepared to “hand off” the operation to Colonel Oliver North, who illegally continues supplying the Contras through the CIA’s informal, secret, and self-financing network. This includes “humanitarian aid” donated by Adolph Coors and William Simon, and military aid funded by Iranian arms sales.
Eugene Hasenfus — Nicaragua shoots down a C-123 transport plane carrying military supplies to the Contras. The lone survivor, Eugene Hasenfus, turns out to be a CIA employee, as are the two dead pilots. The airplane belongs to Southern Air Transport, a CIA front. The incident makes a mockery of President Reagan’s claims that the CIA is not illegally arming the Contras.
Iran/Contra Scandal — Although the details have long been known, the Iran/Contra scandal finally captures the media’s attention in 1986. Congress holds hearings, and several key figures (like Oliver North) lie under oath to protect the intelligence community. CIA Director William Casey dies of brain cancer before Congress can question him. All reforms enacted by Congress after the scandal are purely cosmetic.
Haiti — Rising popular revolt in Haiti means that “Baby Doc” Duvalier will remain “President for Life” only if he has a short one. The U.S., which hates instability in a puppet country, flies the despotic Duvalier to the South of France for a comfortable retirement. The CIA then rigs the upcoming elections in favor of another right-wing military strongman. However, violence keeps the country in political turmoil for another four years. The CIA tries to strengthen the military by creating the National Intelligence Service (SIN), which suppresses popular revolt through torture and assassination.
Panama — The U.S. invades Panama to overthrow a dictator of its own making, General Manuel Noriega. Noriega has been on the CIA’s payroll since 1966, and has been transporting drugs with the CIA’s knowledge since 1972. By the late 80s, Noriega’s growing independence and intransigence have angered Washington… so out he goes.
Haiti — Competing against 10 comparatively wealthy candidates, leftist priest Jean-Bertrand Aristide captures 68 percent of the vote. After only eight months in power, however, the CIA-backed military deposes him. More military dictators brutalize the country, as thousands of Haitian refugees escape the turmoil in barely seaworthy boats. As popular opinion calls for Aristide’s return, the CIA begins a disinformation campaign painting the courageous priest as mentally unstable.
The Gulf War — The U.S. liberates Kuwait from Iraq. But Iraq’s dictator, Saddam Hussein, is another creature of the CIA. With U.S. encouragement, Hussein invaded Iran in 1980. During this costly eight-year war, the CIA built up Hussein’s forces with sophisticated arms, intelligence, training and financial backing. This cemented Hussein’s power at home, allowing him to crush the many internal rebellions that erupted from time to time, sometimes with poison gas. It also gave him all the military might he needed to conduct further adventurism — in Kuwait, for example.
The Fall of the Soviet Union — The CIA fails to predict this most important event of the Cold War. This suggests that it has been so busy undermining governments that it hasn’t been doing its primary job: gathering and analyzing information. The fall of the Soviet Union also robs the CIA of its reason for existence: fighting communism. This leads some to accuse the CIA of intentionally failing to predict the downfall of the Soviet Union. Curiously, the intelligence community’s budget is not significantly reduced after the demise of communism.
Economic Espionage — In the years following the end of the Cold War, the CIA is increasingly used for economic espionage. This involves stealing the technological secrets of competing foreign companies and giving them to American ones. Given the CIA’s clear preference for dirty tricks over mere information gathering, the possibility of serious criminal behavior is very great indeed.
Haiti — The chaos in Haiti grows so bad that President Clinton has no choice but to remove the Haitian military dictator, Raoul Cedras, on threat of U.S. invasion. The U.S. occupiers do not arrest Haiti’s military leaders for crimes against humanity, but instead ensure their safety and rich retirements. Aristide is returned to power only after being forced to accept an agenda favorable to the country’s ruling class.
In a speech before the CIA celebrating its 50th anniversary, President Clinton said: “By necessity, the American people will never know the full story of your courage.”
Clinton’s is a common defense of the CIA: namely, the American people should stop criticizing the CIA because they don’t know what it really does. This, of course, is the heart of the problem in the first place. An agency that is above criticism is also above moral behavior and reform. Its secrecy and lack of accountability allows its corruption to grow unchecked.
Furthermore, Clinton’s statement is simply untrue. The history of the agency is growing painfully clear, especially with the declassification of historical CIA documents. We may not know the details of specific operations, but we do know, quite well, the general behavior of the CIA. These facts began emerging nearly two decades ago at an ever-quickening pace. Today we have a remarkably accurate and consistent picture, repeated in country after country, and verified from countless different directions.
The CIA’s response to this growing knowledge and criticism follows a typical historical pattern. (Indeed, there are remarkable parallels to the Medieval Church’s fight against the Scientific Revolution.) The first journalists and writers to reveal the CIA’s criminal behavior were harassed and censored if they were American writers, and tortured and murdered if they were foreigners. (See Philip Agee’s On the Run for an example of early harassment.) However, over the last two decades the tide of evidence has become overwhelming, and the CIA has found that it does not have enough fingers to plug every hole in the dike. This is especially true in the age of the Internet, where information flows freely among millions of people. Since censorship is impossible, the Agency must now defend itself with apologetics. Clinton’s “Americans will never know” defense is a prime example.
Another common apologetic is that “the world is filled with unsavory characters, and we must deal with them if we are to protect American interests at all.” There are two things wrong with this. First, it ignores the fact that the CIA has regularly spurned alliances with defenders of democracy, free speech and human rights, preferring the company of military dictators and tyrants. The CIA had moral options available to them, but did not take them.
Second, this argument begs several questions. The first is: “Which American interests?” The CIA has courted right-wing dictators because they allow wealthy Americans to exploit the country’s cheap labor and resources. But poor and middle-class Americans pay the price whenever they fight the wars that stem from CIA actions, from Vietnam to the Gulf War to Panama. The second begged question is: “Why should American interests come at the expense of other peoples’ human rights?”
The CIA should be abolished, its leadership dismissed and its relevant members tried for crimes against humanity. Our intelligence community should be rebuilt from the ground up, with the goal of collecting and analyzing information. As for covert action, there are two moral options. The first one is to eliminate covert action completely. But this gives jitters to people worried about the Adolf Hitlers of the world. So a second option is that we can place covert action under extensive and true democratic oversight. For example, a bipartisan Congressional Committee of 40 members could review and veto all aspects of CIA operations upon a majority or super-majority vote. Which of these two options is best may be the subject of debate, but one thing is clear: like dictatorship, like monarchy, unaccountable covert operations should die like the dinosaurs they are.
I was just alerted that my post from 7 years ago had a broken link. https://rbcpa.com//wp-content/uploads/2016/12/Notes_To_Margin_of_Safety.pdf
I posted my entire notes, quite long, and I think the link would provide an easier view. Notes To The Book “Margin Of Safety” Author: Seth Klarman 1991 Prepared by: Ronald R. Redfield, CPA, PFS
According to www.wikipedia.com
"Margin of Safety – Risk-Averse Value Investing Strategies for the Thoughtful Investor" is a name of a book written by Seth A. Klarman, a successful value investor and President of the Baupost Group, an investment firm in Boston. This book is no longer published and sometimes can be found on eBay for more than $1000 (some consider it a collectible item). These notes are hardly all encompassing. These are notes I would find helpful for me, as a money manager. I do not mention Klarman’s important premise of looking at investments as “fractional ownerships.” I don’t mention things like that in these notes, as I am already tuned into those concepts, and do not need a reminder. Hence a reader of these notes, should read the book on their own, and get their own information from it. I found this book at several libraries. One awsome library I went to was the New York Public Library for Science, Business and Industry. http://www.nypl.org/research/sibl/index.html
Throughout this paper you will see items in “quote marks.” The quotes exclusively represent direct quotes of Seth Klarman, from the book. As I read this book, and through completion, I felt fortunate that I have been following most of his philosophies for many years. I am not comparing myself to Klarman, not at all. How could I ever compare myself to the greats of Klarman, Buffett, Whitman etal?
What I did experience via this reading was a confirmation of my style and discipline. This book really put together and confirmed to me, so many of the philosophies and methods which I have been using for many years. These notes are a means for me to look back, and feel my roots every so often. At times in these notes, I have added sections which I have found appropriate in my workings. Introduction
“This book alone will not turn anyone into a successful value investor.
Value investing requires a great deal of hard work, unusually strict discipline
and a long-term investment horizon.”
“This book is a blueprint that, if carefully followed, offers a good possibility
of investment successes with limited risk.”
Understand why things work. Memorizing formulas give the appearance of
competence. Klarman describes the book as one about “thinking about
I interpret much of the introduction of the book, as to not actively buy and
sell investments, but to demonstrate an “ability to make long-term
investment decisions based on business fundamentals.” As I completed the
book, I realize that Klarman does not embrace the long term approach in the
same fashion I do. Yet, the key is to always determine if value still exists.
Value is factored in with tax costs and other costs.
Fight the crowd. I think what Klarman is saying is that it is warm and fuzzy
in the middle of crowds. You do not need to be warm and fuzzy with
Stay unemotional in business and investing!
Study the behavior of investors and speculators. Their actions “often
inadvertently result in the creation of opportunities for value investors.”
“The most beneficial time to be a value investor is when the market is
falling.” “Value investors invest with a margin of safety that protects from
large losses in declining markets.” I have only begun the book, but am
curious as to how any value investor could have stayed out of the way of
1973 –1974 bear market. Some would argue that Buffett exited the business
during this period. Yet, it is my understanding, and I could be wrong, that
Berkshire shares took a big drop in that period. Also, Buffett referred his
investors who were leaving the partnership to Sequoia Fund. Sequoia Fund
is a long term value investment mutual fund. They also had a horrendous
time during the 1973 –1974 massacre.
“Mark Twain said that there are two times in a man’s life when he should
not speculate: when he can’t afford it and when he can.”
“Investors in a stock expect to profit in at least one of three possible ways:
a. From free cash flow generated by the underlying business, which
will eventually be reflected in a higher share price or distributed as
b. From an increase in the multiple that investors are willing to pay
for the underlying business as reflected in a higher share price.
c. Or by narrowing of the gap between share price and underlying
“Speculators are obsessed with predicting – guessing the direction of
“Value investors pay attention to financial reality in making their investment
He discusses what could happen if investors lost favor with liquid treasuries,
and if indeed they became illiquid. All investors could run for the door at
“Investing is serious business, not entertainment.”
Understand the difference between an investment and a collectible. An
investment is one, which will eventually be able to produce cash flow.
“Successful investors tend to be unemotional, allowing the greed of others to
play into their hands. By having confidence in their own analysis and
judgment, they respond to market forces not with blind emotion but with
He discusses Mr. Market. He mentions when a price of a stock declines
with no apparent reason, most investors become concerned. They worry that
there is information out there, which they are not privy to. Heck, I am going
through this now with a position that is thinly traded, and sometimes I think
I am the only purchaser out there. He describes how the investor begins to
second-guess him or herself. He mentions it is easy to panic and just sell.
He goes onto to write, “Yet, if the security were truly a bargain when it was
purchased, the rationale course of action would be to take advantage of this
even better bargain and buy more.”
Don’t confuse the company’s performance in the stock market with the real
performance of the underlying business.
“Think for yourself and don’t let the market direct you.”
“Security prices sometimes fluctuate, not based on any apparent changes in
reality, but on changes in investor perception.” This could be helpful in my
research of the 1973 – 1974 period. As I study that era, it looks as though
price earnings ratios contracted for no real apparent reason. Many think that
the price of oil and interest rates sky rocketed, but according to my research,
that was not until later in the decade.
He discusses the good and bad of Wall Street. He identifies how Wall Street
is slanted towards the bullish side. The reason being that bullishness
generates fees via offerings, 401k’s, floating of debt, etc. etc. One of the
sections is titled, “Financial Market Innovations Are Good for Wall Street
But Bad for Clients.” As I read this, I was wondering if the “pay option
mortgages,” which are being offered by many lenders, are one of these
products. These negative amortization and adjustable mortgages have been
around for 25 years. Yet, they have not proliferated the marketplace in the
past as much as they have the last several years. Lenders such as
Countrywide, GoldenWest Financial and First Federal Financial have been
using these riskier mortgages as a typical type of loan in 2005 and 2006.
“Investors must recognize that the early success of an innovation is not a
reliable indicator of its ultimate merit.” “Although the benefits are apparent
from the start, it takes longer for the problems to surface.” “What appears
to be new and improved today may prove to be flawed or even fallacious
“The eventual market saturation of Wall Street fads coincides with a cooling
of investor enthusiasm. When a particular sector is in vogue, success is a
self-fulfilling prophecy. As buyers bid up prices, they help to justify their
original enthusiasm. When prices peak and start to decline, however, the
downward movement can also become self-fulfilling. Not only do buyers
stop buying, they actually become sellers, aggravating the oversupply
problem that marks the peak of every fad.”
He later writes about investment fads. “All market fads come to an end.”
He clarifies, “It is only fair to note that it is not easy to distinguish an
investment fad from a real business trend.”
"You probably would not choose to dine at a restaurant whose chef always
ate elsewhere. You should be no more satisfied with a money manager who
does not eat his or her own cooking." Just to reiterate, I do eat my own
cooking, and I don’t “dine out” when it comes to investing.
“An investor’s time is required both to monitor the current holdings and to
investigate potential new investments. Since most money managers are
always looking for additional assets to manage, however, they spend
considerable time meeting with prospective clients in addition to
handholding current clientele. It is ironic that all clients, Present and
potential, would probably be financially better off if none of them spent time
with money managers, but a free-rider problem exists in that each client
feels justified in requesting periodic meetings. No single meeting places an
intolerable burden on a money manager’s time; cumulatively, however, the
hours diverted to marketing can take a toll on investment results.”
“The largest thrift owners of junk bonds – Columbia Savings and Loan,
CenTrust Savings, Imperial Savings and Loan, Lincoln Savings and Loan
and Far West Financial, were either insolvent of on the brink of insolvency
by the end of 1990. Most of these institutions had grown rapidly through
brokered deposits for the sole purpose of investing the proceeds in junk
bonds and other risky assets.”
I personally suspect that the same will be said of the aggressive mortgage
lenders of 2005 – 2006. I have looked back at my files of 1st quarter 1980
Value Line for a few of these companies mentioned above. Here are some
notes on one of the companies I found.
Far West Financial: Rated C++ for financial strength. In 1979 it was
selling for 5/% of book value. “The yield-cost spread is under pressure.”
“Lending is likely to decline sharply in 1980.” “Far West’s earnings are
likely to sink 30 – 35% in 1980. Reasons: The deteriorating margin between
yield on earning assets and the cost of money, less loan fee income…” Keep
in mind that the stock price rose around 400% from 1974 – 1979. From
1968 – 1972 the P/E ratio was in a range from 11 –17. From 1973 through
1979 the P/E ratio was in a range from 3.3 – 8.1. It would be interesting for
me to look at the 1990 – 1992 Value Lines of the same companies. A Value Investment Philosophy:
“One of the recurrent themes of this book is that the future is unpredictable.”
“The river may overflow its banks only once or twice in a century, but you
still buy flood insurance.” “Investors must be prepared for any eventuality.”
He describes that an investor looking for a specific return over time, does
not make that goal achievable. “Targeting investment returns leads investors
to focus on potential upside rather on downside risk.” “Rather than targeting
a desired rate of return, even an eminently reasonable one, investors should
target risk.” Value Investing: The Importance of a Margin of Safety”
“Value investing is the discipline of buying securities at a significant
discount from their current underlying values and holding them until more of
their value is realized. The element of the bargain is the key to the process.”
“The greatest challenge for value investors is maintaining the required
discipline. Being a value investor usually means standing apart from the
crowd, challenging conventional wisdom, and opposing the prevailing
investment winds. It can be a lonely undertaking. A value investor may
experience poor, even horrendous, performance compared with that of other
investors or the market as a whole during prolonged periods of market
“Value investors are students of the game; they learn from every pitch, those
at which they swing and those they let pass by. They are not influenced by
the way others are performing; they are motivated only by their own results.
He discusses that value investors have “infinite patience.”
He discusses that value investors will not invest in companies that they don’t
understand. He discusses how value investors typically will not own
technology companies for this reason. Warren Buffett has stated this as the
reason as to why he does not own any technology companies. As a side
note, I do believe that at some point, Berkshire will take a sizable position in
Microsoft ($24.31 5/1/06). Klarman mentions that many also shun
commercial banks and property and casualty companies. The reasons being
that they have unanalyzable assets. Keep in mind that Berkshire Hathaway
(Warren Buffett is the majority shareholder) is basically in the property and
“For a value investor a pitch must not only be in the strike zone, it must be
in his “sweet spot.”” “Above all, investors must always avoid swinging at
He goes onto discuss that determining value is not a science. A competent
investor cannot have all the facts, know all the answers or all the questions,
and most investments are dependent on outcomes that cannot be foreseen.
“Value investing can work very well in an inflationary environment.” I
wonder if the inverse is true? Are we in a soon to be deflationary
environment for real estate? I think so. Sure enough he discusses
deflationary environments. He explains how deflation is “a dagger to the
heart of value investing.” He explains that it is hardly fun for any type of
investor. He explains that value investors should worry about declining
business values. Yet, here is what he said value investors should do in this
a. “Investors can not predict when business values will rise or fall,
valuation should always be performed conservatively, giving
considerable weight to worst-case liquidation value and other
b. Investors fearing deflation could demand a greater discount than
usual. “Probably let more pitches go by.”
c. Deflation should give greater importance to the investment time
“A margin of safety is achieved when securities are purchased at prices
sufficiently below underlying value to allow for human error, bad luck, or
extreme volatility in a complex, unpredictable and rapidly changing world.”
“The problem with intangible assets, I believe, is that they hold little or no
margin of safety.” He describes how tangible assets might have alternate
uses, hence providing a margin of safety. He does explain how Buffett
recognizes the value of intangibles.
“Investors should pay attention not only to whether but also to why current
holdings are undervalued.” He explains to remember the reason you bought
the investment, and if that no longer holds true, then sell the investment.
He tells the reader to look for catalysts, which might assist in adding value.
He looks for companies with good management and insider ownership
(“personal financial stake in the business.”)
“Diversify your holdings and hedge when it is financially attractive to do
He explains that adversity and uncertainty create opportunity.
“A market downturn is the true test of an investment philosophy.”
“Value investing is, in effect, predicated on the proposition the efficientmarket (EMT) hypothesis is frequently wrong.” He explains that market
pricing is more efficient with larger capitalization companies.
“Beware of Value Pretenders”
This means, watch out for the misuse of value investing. He explains that
these pretenders came about via the successes of Michael Price, Buffett,
Max Heine and the Sequoia Fund. He labels these people as value
chameleons, and states that they are failing to achieve a margin of safety for
their clients. He claims these investors suffered substantial losses in 1990. I
find this section difficult. For one, the book was published in 1991,
certainly not a long enough time to comment on investments of 1990. Also,
he doesn’t mention the broad based declines of 1973 – 1974
“Value investing is simple to understand but difficult to implement.” “The
hard part is discipline, patience and judgment.” Wait for the fat pitch.
“At the Root of a Value Investment Philosophy”
Value investors look for absolute performance, not relative performance.
They look more long term. They are willing to hold cash reserves when no
bargains are available. Value investors focus on risk as well as returns. He
discusses that the greater the risk, does not necessarily mean the greater the
return. He feels that risk erodes returns because of losses. Price creates
return, not risk.
He defines risk as, “ both the probability and the potential of loss.” An
investor can counteract risk by diversification, hedging (when appropriate)
and invest with a margin of safety.
He eloquently discusses the following, “The trick of successful investors is
to sell when they want to, not when they have to. Investors who may need
to sell should not own marketable securities other than U.S. Treasury Bills.”
Warning, warning , warning. Eye opener next. “The most important
determinant of whether investors will incur opportunity cost is whether or
not part of their portfolios are held in cash.” “Maintaining moderate cash
balances or owning securities that periodically throw off appreciable cash is
likely to reduce the number of foregone opportunities.”
“The primary goal of value investors is to avoid losing money.” He
describes the 3 elements of a value-investment strategy.
a. A bottoms up approach, searching via fundamental analysis.
b. Absolute performance strategy.
c. Pay attention to risk. “The Art of Business Valuation”
He explains that NPV and IRR are great tools for summarizing data. He
explains they can be misleading unless the flows are contractually
determined, and when all payments are received when due. He talks about
the adage, “garbage in, garbage out.” As a side note, Milford Blonsky, CPA
during the 1970’s through the mid 1990’s, taught me that with frequency.
Klarman believes that investments have a range of values, and not a precise
He discusses 3 tools of business valuation”
a. Net Present Value (NPV) analysis. “NPV is the discounted
value of all future cash flows that the business is expected to generate.
He describes the importance of avoiding market comparables, for
obvious reasons. Use this method when earnings are reasonably
predictable and a discount rate can be chosen. This is often a guessing
game. Things can go wrong, things change. Even management can’t
predict changes. “An irresolvable contradiction exists: to perform
present value analysis, you must predict the future, yet the future is
reliably predictable.” He explains that this should be dealt with using
He discusses choosing a discount rate. He states, “A discount rate is, in
effect, the rate of interest that would make man investor indifferent between
present and future dollars.” He mentions that there is no single correct
discount rate and there is no precise way to choose one. He explains that
some investors use a generic round number, like 10%. He claims it is an
easy round number, but not necessarily the best choice. He emphasizes to be
conservative when choosing the discount rate. The less the risk of the
investment, the less the time frame, the less the discount rate should be. He
explains, “Depending on the timing and magnitude of the cash flows, even
modest differences in the discount rate can have a considerable impact on
the present-value calculation.” Of course discount rates are changed by
changing interest rates. He discusses how investing when interest rates are
unusually low, could cause inflated share prices, and that one must be
careful in making long term investments.
Klarman discusses using various DCF and NPV scenarios. He also
emphasizes one should discount earnings or cash flows as opposed to
dividends, since not all companies pay dividends. Of course, one wants to
understand the quality of the earnings and their reoccurring nature.
b. Analyze liquidation value. You need to understand what would
be an orderly liquidation versus fire sale liquidation. Klarman
quotes Graham’s “net net working capital.” Net working capital =
Current Assets – Current Liabilities. Net Net working capital =
Net Working Capital – all long-term liabilities. Keep in mind that
operating losses deplete working capital. Klarman reminds us to
look at off balance sheet liabilities, such as under-funded pension
c. Estimate the price of the company, or its subsidiaries considered
separately, as it would trade on the stock market. This method is
less reliable than the other 2 and should be used as a yardstick.
Private Market Value (PMV) does give an analyzer some rules of
thumb. When using PMV one needs to understand the garbage in,
garbage out concept, as well as the use of relevant and
conservative assumptions. One has to be wary of certain periods
of excesses when using this method. Look at historic multiples. I
am reminded of some recent research I have been working on in
regards to 1973 – 1974. Utility companies were selling for over
18X earnings, when they typically sold for much lower multiples.
I believe this was the case in 1929 as well. Klarman mentioned
television companies, which historically sold for 10X pre-tax cash
flow, but in the late 80’s were selling for 13 to 15X pre-tax cash
flow. “Investors relying on conservative historical standards of
valuation in determining PMV will benefit from a true margin of
safety, while others’ margin of safety blows with the financial
winds.” He suggests when you use PMV to determine what you
would pay for the business, not what others would pay to own
them. “At most, PMV should be used as one of several inputs in
the valuation process and not the exclusive final arbiter of value.”
I think that Klarman mentions that all tools should be used, and not to give
to great a value to any one tool or procedure of valuation. NPV has the
greatest weight in typical situations. Yet an analyst has to know when to
apply each tool, and when a specific tool might not be relevant. He
mentions that a conglomerate when being valued might have a variety of
methods for the different business components. He suggests, “Err on the
side of conservatism.”
Klarman quotes Soros from “The Alchemy of Finance.” “Fundamental
analysis seeks to establish how underlying values are reflected in stock
prices, whereas the theory of reflexivity shows how stock prices can
influence underlying values. (Pg. 51 1987 ed)”
Klarman mentions that the theory of reflexivity makes the point that a stock
price can significantly influence the value of a business. Klarman states,
“Investors must not lose sight of this possibility.” I am reminded of Enron
when reading this. Their business fell apart because they no longer were
able to use their stock price as currency. Soon covenants were violated
because of falling stock prices. Mix that difficult ingredient with fraud, and
you have a fine recipe for disaster. How many companies today are reliant
on continual liquidity from the equity or bond markets?
He discussed a valuation from 1991 of Esco. He indicated that the “working
capital / Sales ratio” was worthwhile to look at. He included a discount rate
of 12% for first 5 years of valuation, followed by 15%. He mentioned that
these higher rates indicated “uncertainty” in themselves. He stressed that
investors should consider other valuation scenarios and not just NPV. This
was all outlined above, but it was cool to see in a real time approach. He
discussed that PMV was not useful, as there were no comparables. He
indicated that a spin-off approach was helpful, as Esco previously
purchased a competitor (Hazeltine). He mentioned that the Hazeltine
acquisition, although much smaller than Esco, showed Esco to be severely
undervalued. He indicated that liquidation value would not be useful,
because defense companies could not be easily liquidated. He did look at a
gradual liquidation, as ongoing contracts could be run to completion. He did
use Stock market valuation as a guide. He noticed that the company was
selling for a small fraction of tangible assets. He called this a very low level,
considering positive cash flow and a viable company. He couldn’t identify
the exact worth of Esco, but he could identify that it was selling for well
below intrinsic value. He looked at all worst-case scenarios, and still
couldn’t pierce the current market price. He claimed the price was based on
“disaster.” He also noticed insider purchasing in the open market.
Klarman discussed that management could manipulate earnings, and that
one had to be wary of using earnings in valuation. He mentioned that
managements are well aware that investors price companies based on growth
rates. He hinted that one needs to look at quality of earnings, and the need
to interpret cash costs versus non-cash costs. Basically, indicating a
normalization of earnings process. “…It is important to remember that the
numbers are not an end in themselves. Rather they are a means to
understanding what is really happening in a company.”
He discusses that book value is not very useful as a valuation yardstick.
Book Value provides limited information (like earnings) to investors. It
should only be considered as one component of thorough analysis.
“The Challenge of Finding Attractive Investments”
If you see a company selling for what you consider to be a very inexpensive
price, ask yourself, “What is wrong with this company?” This reminds me
of Charles Munger, who advises investors to “invert, always invert.”
Klarman mentions, “A bargain should be inspected and re-inspected for
possible flaws.” He indicates possible flaws might be the existence of
contingent liabilities or maybe the introduction of a superior product by a
competitor. Interestingly enough, in the late 90’s, we noticed that Lucent
products were being replaced by those of the competition. We can’t blame
the entire loss of wealth on Lucent inferiority at the time, as the entire sector
followed Lucent’s wipeout at a later date. There were both industry and
company specific issues that were haunting Lucent at the time.
Klarman advises to look for industry constraints in creating investment
opportunities. He cited that institutions frowned upon arbitrage plays, and
that certain companies within an industry were punished without merit. He
mentions that many institutions cannot hold low-priced securities, and that in
itself can create opportunity. He also cites year-end tax selling, which
creates opportunities for value investors.
“Value investing by its very nature is contrarian.” He explains how value
investors are typically initially wrong, since they go against the crowd, and
the crowd is the one pushing up the stock price. He discusses how the value
investor for a period of time (and sometimes a long time at that) will likely
suffer “paper losses.” He hinted that contrarian positions could work well in
over-valued situations, where the crowd has bid up prices. Profits can be
claimed from short positions.
He claims that no matter how extensive your research, no matter how
diligent and smart you are, the diligence has shortcomings. For one, “some
information is always elusive,” hence you need to live with incomplete
information. Knowing all the facts does not always lead to profit. He cites
the “80/20 rule.” This means that the first 80% of the research is gathered in
the first 20% of the time spent finding that research. He discusses that
business information is not always made available, and it is also
“perishable.” “High uncertainty is frequently accompanied by low prices.
By the time uncertainty is resolved, prices are likely to have risen.” He hints
that you can make decisions quicker, without all of the information, and take
advantage of the time others are looking and delving into the same
information. This extra time can cause the late and thorough investor to lose
their margin of safety.
Klarman discusses to watch what the insiders are doing. “The motivation of
company management can be a very important force in determining the
outcome of an investment.” He concludes the chapter with this quote:
“Investment research is the process of reducing large piles of information to
manageable ones, distilling the investment wheat from the chaff. There is,
needless to say, a lot of chaff and very little wheat. The research process
itself, like the factory of a manufacturing company, produces no profits. The
profits materialize later, often much later, when the undervaluation identified
during the research process is first translated into portfolio decisions and
then eventually recognized by the market.” He goes onto discuss that the
research today, will provide the fruits of tomorrow. He explains that an
investment program will not succeed if “high quality research is not
performed on a continuing basis.”
Klarman discussed investing in complex securities. His theme being, if the
security is hard to understand and time consuming, many of the analysts and
institutions will shy away from it. He identifies this as “fertile ground” for
The goal of a spin-off, according to Klarman is for the former parent
company to create greater value as a whole by spinning off businesses that
aren’t necessarily in their strategic plans. Klarman finds opportunity
because of the complexity (see above) and the time lag of data flow. I don’t
know in 2006 if this is still the case, but Klarman mentions there is a 2 to 3
month lag of data flow to the computer databases. I have owned several
spin-offs and have ultimately sold them, as they were too small for the pie,
or just not followed by my research. As I think back, I think quite a few of
these spin-offs did fairly well. One example would be Freescale. As I look
at the Freescale chart, it looks like it went from around 18 two years ago, to
around 33 today. Ahh, this topic alone, enabled the book to provide
potential value to my future net worth.
Look for Net Operating Losses as a potential benefit. He describes the
beauty of investing in bankrupt companies is the complexity of the analysis.
This complexity, as described often in his book, leads to potential
opportunity, as many investors shy away from the complex analysis.
Pending a bankruptcy, costs get leaner and more focused, cash builds up and
compounds with interest. This cash buildup can simplify the process of
reorganization, because all agree on the value of cash.
Michael Price and his 3 stages of Bankruptcy:
a. Immediately after bankruptcy. This is the most uncertain stage,
but also one of the greatest opportunities. Liabilities are not
evident, there is turmoil, financial statements are late or
unavailable and the underlying business may not have stabilized.
The debtor’s securities are also in disarray. This is accompanied
by forced selling at any price.
b. The second stage is the negotiation of a reorganization plan.
Klarman mentions that by this time, many analysts have pored
over the financials and the company. Much more is known about
the debtor, uncertainty is not as acute, but certainly still exists.
Prices will reflect this available information.
c. The third stage is the finalization of the reorganization and the
debtor’s emergence from bankruptcy. He claims this stage takes 3
months to a year. Klarman mentions that this last stage most
closely resembles a risk-arbitrage investment.
“When properly implemented, troubled-company investing may entail less
risk than traditional investing, yet offer significantly higher returns. When
badly done, the results of investing can be disastrous…” He emphasizes that
the market is illiquid and traders take advantage of unsophisticated investors.
“Caution is the order of the day for the ordinary investor.”
Klarman mentions to use the same investment valuation techniques you
would use for a solvent company. He suggests that the analyst look to see if
the companies are intentionally “uglifying” their financial statements. He
cites the example of expensing rather than capitalizing certain expenses.
The analyst needs to look at off-balance sheet arrangements. He cites
examples as real estate and over-funded pension plans.
Klarman discusses the investor should typically shy away from investing in
common stock of bankrupt companies. He mentions there is an occasional
home run, but he states, “as a rule investors should avoid the common stock
of bankrupt entities at virtually any price; the risks are great and the returns
are very uncertain.” He discusses one ploy of buying the bonds and shorting
the stock. He used an example of Bank Of New England (BNE). He
mentioned that BNE bonds were selling at 10 from 70, whereas the stockstill carried a large market capitalization.
He concludes the bankruptcy section by stressing that this type of investing
is sophisticated and highly specialized. The competition in finding these
securities is savvy, experienced and hard-nosed. When this area becomes
popular, be extra careful, as most of the money made is based on the
uneconomic behavior of investors.
Portfolio Management and Trading
“All investors must come to terms with the relentless continuity of the
He mentions the need for liquidity in investments. A portfolio manager can
buy a stock and subsequently find out he or she made an error, or that a
competitor has a stronger product. With that said, the portfolio manager can
typically sell that situation. If the investment was in an annuity or limited
partnership, the liquidity is pierced and the change of strategy cannot be
economically deployed. “When investors do not demand compensation for
bearing illiquidity, they almost always come to regret it.”
He discusses that liquidity is not of great importance in managing a longterm oriented portfolio. Most portfolios should contain a balance of
liquidity, which can quickly be turned into cash. Unexpected liquidity needs
do occur. The longer the duration of illiquidity, should demand a greater
form of compensation for the liquidity sacrifice. The cost of illiquidity
should be very high. “Liquidity can be illusory.” Watch out for situations
that are liquid one day, and illiquid the next. He claims this can happen in
“Investing is in some ways an endless process of managing liquidity.”
When a portfolio is in cash only, the risk of loss is non-existent. The same
goes for the lack of gain when fully invested in cash. Klarman mentions,
“The tension between earning a high return, on the one hand, and avoiding
risk, on the other, can run high. This is a difficult task.
“Portfolio management requires paying attention to the portfolio as a whole,
taking into account diversification, possible hedging strategies, and the
management of portfolio cash flow.” He discusses that portfolio
management is a further means of risk reduction for investors.
He suggests that, as few as ten to fifteen different holdings should be suffice
for diversification. He does mention, “My view is that an investor is better
off knowing a lot about a few investments than knowing only a little about
each of a great many holdings.” He mentions that diversification is
“potentially a Trojan horse.” “Diversification, after all, is not how many
different things you own, but how different the things you do own are in the
risks they entail.”
In regards to trading Klarman stated, “The single most crucial factor in
trading is the developing the appropriate reaction to price fluctuations.
Investors must learn to resist fear, the tendency to panic, when prices are
falling, and greed, the tendency to become overly enthusiastic when prices
“Leverage is neither necessary nor appropriate for most investors.” How do you evaluate a money manager?
a. “Personal interviews are absolutely essential.”
b. “Do they eat their own cooking?” He feels this is the most
important question of an advisor. When an advisor does not invest
in his or her own preaching, Klarman refers to it as “eating out.”
You want the advisor to act in a “parallel” fashion to his or her
c. “Are all clients treated equally?”
d. Examine the investor’s track record during different periods of
varying amounts of assets managed. How has the advisor
performed as his or her assets have grown? If assets are shrinking,
try to examine the reason.
e. Examine the investment philosophy. Does the advisor worry
about absolute returns, about what can go wrong, or is the advisor
worried about relative performance?
f. Does advisor have constraining rules? Examples of this could be
the requirement to always be fully invested.
g. Thoroughly analyze the past investment performance. How long a
track record is there? Was it achieved in one or more market
h. How did the clients do in falling markets?
i. Have the returns been steady over time, or have they been
j. Was the track record from a steady pace, or just a couple of
k. Is the manager still using the same philosophy that he or she has
l. Has the manager produced good long-term results despite having
excess cash and cash equivalents in the portfolio allocation? This
could indicate a low risk approach.
m. Were the investments in the underlying portfolio themselves
particularly risky, such as shares of highly leveraged companies?
Conversely, did the portfolio manager reduce risk via hedging,
diversification and senior securities?
n. Make sure you are personally compatible with the advisor. Make
sure you are comfortable with the investment approach.
o. After you hire the manager, monitor them on an ongoing basis.
The issues that were addressed prior to hiring should be used after
He finishes the book with these words. “I recommend that you adopt a
value-investment philosophy and either find an investment professional with
a record of value-investment success or commit the requisite time and
attention to investing on your own.”
Ronald R. Redfield CPA, PFS
May 3, 2006
The 1920’s, leading up to the stock crash, also featured a huge amount of margin trading – when investors borrow money using stock as collateral, and use the loan to buy even more stock. Since stock prices were rising constantly, banks were happy to give the loans and investors, both new and old, were taking them and turning huge profits. 6th of November 1929 – Market gaps down, and closing 9.9% down for the day. September 1929 – November 1929 – Panic Selling on Wall St, with a 49% sell-off. Dow falls from 381 to 198. November 1929 – April 1930 – Market makes a 5 month recovery, with a 49% Bear Market Rally. Dow rises from 198 to 294 Disregarding the volatility of the stock market, they invested their entire life savings. Others bought stocks on credit (margin). When the stock market took a dive on Black Tuesday, October 29, 1929, the country was unprepared. The economic devastation caused by the Stock Market Crash of 1929 was a key factor in the start of the Great Depression. The stock market crash of 1929 – considered the worst economic event in world history – began on Thursday, October 24, 1929, with skittish investors trading a record 12.9 million shares. The stock market crash of 1929 – considered the worst economic event in world history – began on Thursday, October 24, 1929, with skittish investors trading a record 12.9 million shares. On
Brief History of that other economic designed crash of 1929 BBC documentary On October 29, 1929, Black Tuesday hit Wall Street as investors traded some 16 mi... Stock market crash of 1929 ... the market lost 11 percent of its value at the opening bell on very heavy trading. ... 10] more investors facing margin calls decided to get out of the market, and ... This country is fundamentally sound.…》1929/10/30 and the technical situation in the stock market is not going to prevent the great improvement, forcastive improvement in our wonderful prosperity. CATÉGORIE Culture générale et histoire des faits économiques Le krach de 1929 est une crise boursière qui se déroula à la Bourse de New York entre le jeudi... Reel #: 9066 Scenes from offices and the stock market trading floor during the Wall Street Crash of 1929, and the aftermath: The start of The Great Depression. Scenes of unemployed men on park ...