And across the financial markets, a sea change is taking place. Investors are abandoning the time-tested “stocks for the long run” optimism that dominated since the late 1980s. Instead, there is a widening belief that the mess left behind by the housing bubble and financial crisis will be a morass to contend with for years.

– Emmanuel Derman, “My Life as a Quant”

Throughout the book, Gawande discusses the concept of “positive deviants” — doctors whose outcomes are much better than the averages would predict. He describes how several physicians have advanced their craft by adopting techniques that go beyond the typical standards of care, like how Warren Warwick became the most successful cystic fibrors doctor, and how the Apgar Score transformed obstetrics.

Here is a paraphrased summary of Gawande’s suggestions for how to become a positive deviant:

1. Ask an unscripted question: you start to remember the people you see, instead of letting them all blur teogether. and sometimes you discover the unexpected… if you ask a question, the machine begins to feel less like a machine
2. Don’t complain: its boring, it doesn’t solve anything, and it will get you down
3. Count something: regarless of what ultimately does in medicine — or outside medicine, for that matter — one should be a scientist in this world. In the simplest terms, this means one should count something….the only requirement is that what you count should be interesting to you… if you count something you find interesting, you will learn something interesting.
4. Write something: i do not mean this to be an intimidating suggestion…what you write need not achieve perfection. it need only add some small observation about the world.
5. Change: make yourself an early adopter. look for the opportunity to change… be willing to recognize the inadecuacies in what you do and seek out solutions

In this interview, Black says his process is to identify good businesses trading at cheap prices. He uses six criteria to screen for good businesses, including:

• The company should earn a minimum 15% after-tax return on equity. For a cyclical business, the corporation must achieve this 15% target on its recovery earnings.
• I look for companies that grow both revenues and earnings faster than inflation over a 3 to 5 year time horizon
• For non-financial companies, I perform a free cash flow analysis to determine if a firm can finance its growth from internally-generated operating cash flow.
• I analyze the areas of capital intensity such as inventory turns, days of receivables, and sales to fixed assets.
• Companies with low debt/equity ratios

Black offered six picks for the 2009 Barron’s roundtable, including: Oracle, General Dynamics, XTO Energy, Endo Pharm Holdings, Ameron International, and StealthGas

Most important, I believe you need to be a good writer. Look at Buffett; he’’s one of the best writers ever in the business world. It’s not a coincidence that he’’s also one of the best investors of all time. If you can’’t write clearly, it is my opinion that you don’’t think very clearly. And if you don’’t think clearly, you’’re in trouble. There are a lot of people who have genius IQs who can’’t think clearly, though they can figure out bond or option pricing in their heads.

Mark Sellers gave the following speech at Harvard Business School, in which he highlights seven behavioral traits that distinguish great investors. This is the best description I’ve seen of the psychological factors underlying value investing.

• The ability to buy stocks while others are panicking and sell stocks while others are euphoric.
• Being obsessive about playing the game and wanting to win
• A willingness to learn from past mistakes
• An inherent sense of risk based on common sense
• Confidence in their own convictions and stick with them, even when facing criticism
• Important to have both sides of your brain working, not just the left side
• The ability to live through volatility without changing your investment thought process

The first thing we do is figure out what the problem is. Ninety percent of making money in stocks is not losing money, which has to do with knowing what the problem is and how it can be solved. Every company we buy has a problem with it, otherwise it wouldn’t be cheap.

We read sell-side reports, SEC filings, and talk to management. Within one or two days, we decide if we’re comfortable that the company can solve the problem. Then we do another week or so of further research.

Until recently, Mark Sellers, a former morningstar analyst, ran a small value porfolio that returned 35%. This motley fool interview covers several aspects of his investing process, including evaluating management, thinking in terms of decision trees, when to sell, and portfolio concentration.

Here’s a hour-long interview with legendary value investor Seth Klarman.

Since its founding in 1982, Klarman’s firm, the Boston-based Baupost Group, has grown from managing twenty-seven million dollars for three wealthy families to over six billion dollars for institutional clients. Today, the firm employs sixty people, including twenty investment analysts. Its focus on risk-averse value-oriented investment strategies have allowed the firm to earn an average 20% returns while holding a large amount of its portfolio in cash.

This interview, taped at a Harvard psychology lecture, focuses on Klarman’s leadership style, and the lessons he has learned in running an investment firm.

Here’s an amazing hour and a half Q&A with Warren Buffett, recorded at the University of Florida.

In the latest McKinsey Quarterly, Richard Dobbs and Tim Kollar argue that the current financial crisis hasn’t increased the cost of capital. While the cost of long-term debt has risen in the past year, their data shows that (aside from junk bonds) it is still at historically low levels, due to the dramatic drop in interest rates that occurred after 9/11.

To assess cost of equity, they created a DCF model that relates changes in earnings to changes in share prices. By analyzing the behavor of consumer staples companies with stable earnings, they contend that the current drops in the market have increased the cost of equity by only half a percentage point.

“The Quarterly: You question many of the underpinnings of modern financial theory. If you were the dean of a business school, how would you overhaul the curriculum?

Nassim Nicholas Taleb: I would tell people to learn more accounting, more computer science, more business history, more financial history. And I would ban portfolio theory immediately. It’s what caused the problems. Frankly, anything in finance that has equations is suspicious. I would also ban the use of statistics because unless you know statistics very, very well, it’s a dangerous, double-edged sword. And I would ban linear regression. All these things don’t work.”