RichardGibbons

Bumping this since Gio asked in the painful Fairfax thread. The main difference between my thoughts then and my last post are. I shouldn't have said the ZIV long is comparable to a UVXY short. I'm not sure why I said that, because it isn't very similar at all, and I knew it then. It's similar in the sense that they will mostly move in the same direction, but the magnitude of the moves and the long term results will be very different. To me now, ZIV seems superior to SVXY, just because of its lower volatility and far lower chance of going to zero. That makes it much more tax-efficient, less complex, and less impacted by volatile volatility. I'll still do SVXY trades occasionally, but will be more opportunistic (i.e. caring more about mean reversion and less about contango).

No, you're right, rjstc. I did actually make a buy today -- ZIV. Doesn't belong on this board though, and it has been discussed elsewhere.

These are interesting points, some of which I agree with and many of which I don't. The problem is that I don't think at this point that you actually want to have a good-faith discussion about them, and I feel I've made my position very clear to anyone who cares to read it. Plus, it's annoying discussing many of these things, since you either aren't rigorous with definitions, or are deliberately distorting them to try to make your point. (e.g. "value of security" <> "Richard would pay that value"; "value of FFH shares" <> "market price of securities in FFH's portfolio"), and another reason I won't get into. Plus, I have a feeling that the board is pretty sick of this dialog by now, so I think we should give them a break. Don't worry, I'm sure we'll argue about something again before the year is done. :) Good luck.

Try to reconcile that comment "makes no sense" with this one: Right, so why does it "make no sense" to value the securities at market if you don't disapprove of valuing their securities at market? To me this looks like two different Richards are posting their thoughts. Yeah, that's because there's a difference between "valuing their securities at market" and valuing their security (i.e. shares of FFH) at the value of the securities they hold. Those really aren't the same thing. That's true but it's off-topic. In the first quote I provided above, you said that valuing it (hypothetical Fairfax) at book value made no sense. Thus, in that quote you are valuing the securities on the balance sheet above market. That conflicts with the second quote where you say that you don't do that. No, I'm not. I'm valuing the security (hypothetical FFH) above book value. I say nothing about the value of the securities on their book. (And even if you assume book value is consisting entirely of securities at their current market price, I'm still saying nothing about the value of the securities on their book.)

So, up there you say "in a hypothetical". So do you understand what a hypothetical means? Can you make the leap to figure out why taking a hypothetical and using it as evidence to say that's what I think Fairfax should be worth, is misrepresenting my view? To make it clear, any hypothetical examples I use aren't necessarily representative of how I view reality. For instance, if I say, "hypothetically, if China attempted to land an army in California, USA would probably try to stop them", I'm not saying "hey, China's attempting to land an army in California!" And if you say "Richard's saying China is attempting to land an army in California", you are misrepresenting my views. (To be explicit, as far as I know, China is not attempting to land an army in California.) Is that clear? (Please tell me that you've figured out that the is conversation has long since past the stage where it became pointless and boring....)

Try to reconcile that comment "makes no sense" with this one: Right, so why does it "make no sense" to value the securities at market if you don't disapprove of valuing their securities at market? To me this looks like two different Richards are posting their thoughts. Yeah, that's because there's a difference between "valuing their securities at market" and valuing their security (i.e. shares of FFH) at the value of the securities they hold. Those really aren't the same thing.

Also, please don't misrepresent my position.

Please don't misrepresent my position. I haven't. I said that if they are indeed value investors, and if they indeed have a portfolio of stocks and bonds that is marked-to-market below intrinsic value.... then it must be the case that FFH itself should not be trading at intrinsic value. You disagreed, saying that we must DCF those future capital gains -- therefore, the only way for that to be the case is if the market puts the "magic hat" premium on FFH such that the current market price reflects the intrinsic value of the stocks and bonds that they currently hold. It's okay though if you don't even realize the implications of what you said, but it's not a misrepresentation. Sorry, where did I say that I think they're going to have six-sigma returns? Where did I say that I think that I believe their portfolio is trading below fair value? Heck, maybe I think that they are likely to under perform the market. Please don't misrepresent my position. First, you disapprove of valuing their securities at market. Now, you claim you can't tell if they overperform or will underperform the market. Which Richard will we hear from next? I also haven't said that I disapprove or approve of valuing their securities at market, or claimed that I can't tell if they will overperform or underperform the market. Oh, I think I figured out why you're so confused. You believe that someone saying "I didn't say X" means "I believe the opposite of X". That isn't the case, OK? Saying "I didn't say X" doesn't imply anything about the my beliefs about X. The Richard you'll hear from next is the one who doesn't want you to misrepresent his position, because he's proven you wrong already, is bored of the discussion, but doesn't want people to believe lies about his beliefs. Same one as the last 3 messages. Please don't misrepresent my position. <== This is what I'm saying (just in case it isn't clear)

Please don't misrepresent my position. I haven't. I said that if they are indeed value investors, and if they indeed have a portfolio of stocks and bonds that is marked-to-market below intrinsic value.... then it must be the case that FFH itself should not be trading at intrinsic value. You disagreed, saying that we must DCF those future capital gains -- therefore, the only way for that to be the case is if the market puts the "magic hat" premium on FFH such that the current market price reflects the intrinsic value of the stocks and bonds that they currently hold. It's okay though if you don't even realize the implications of what you said, but it's not a misrepresentation. Sorry, where did I say that I think they're going to have six-sigma returns? Where did I say that I think that I believe their portfolio is trading below fair value? Heck, maybe I think that they are likely to under perform the market. Please don't misrepresent my position.

Please don't misrepresent my position. I've said nothing about the value of Fairfax. That said, you are correct that I do believe in the ridiculous assertion that fair value of a business is the discounted value of its estimated future cash flows. It is in contrast to your belief that investment businesses are special and should only be valued at the value of their assets. Also, I think your definition of value is different. For you, it seems to mean, "I would buy this thing at this price". For me, it means "this is what I think the business is worth".

This is a hilarious response, because it doesn't address any of the counterexample at all. It's like "Oops, I was just proved wrong. Umm, let's wave my hands, talk about option pricing, paying managers money, and hope that people don't notice I was just proven wrong." OK, now I'm going to shut up, because I'm being a bit of a jerk. It's not nice to call people on these sorts of things.

Most Monte Carlo-based studies I've seen indicate that if you only withdraw 3% of your (balanced) portfolio a year, your money will be very likely to continually appreciate. So, my personal strategy is to take an even more conservative 2.5% withdrawal rate. In other words, for every dollar of income I want in retirement, I want $40 of savings. If I were older, I wouldn't be this conservative.

Was done with this discussion, but I thought of an example that amuses me. Company A: Puts all of its $100M in assets in an index, and waits. Company B: Its management has stated that its strategy will be as follows. It will holds $100M cash, except every week, 2 minutes before the SPY options are about to expire, it puts 50% of its portfolio into purchasing the farthest out of the money options that are available. These options will almost certainly expire worthless, so its value falls 50% every week. Per Ericopoly's valuation methodology, these two companies have the same value. (In fact, I imagine he'd be eager to purchase company B, since it would likely be trading at, like, 1% of Ericopoly's fair value. A huge bargain!)

I suspect part of the reason for the low response rate is that many of the pros don't read this board on weekends (simply a hypothesis based on volume of posts). See if anyone answers tomorrow....

Yeah, you know, this doesn't make any sense. Your first clue should have been that this is the thesis of your post: This is nuts, and should have clued you in that your logic is flawed. That said, I've made my point as simply as I can make it, so I don't have anything to add. Good luck.

I'm not valuing the equities at a premium. I'm valuing a business which is more than just assets. The fact that the business involves investing is irrelevant. I think Dhandho, just like every other business, should trade at multiple that is dependent on its discounted future free cash flows. If you think that Dhandho is going to greatly outperform the returns of the market, then you're saying is the equivalent to saying that Dhandho should trade greatly below the value of its future cash flows. And if you believe in DCF for other companies, but not for investing companies, you're saying that Dhando should be cheaper than those other companies that you do value using DCF. To me, that's a pretty bad idea. (This is the funny thing about this discussion. If you follow through your reasoning to the natural conclusions, you very quickly reach a contradiction that should indicate to you that your premise is faulty. Well, unless you want to throw out DCF entirely.) That said, if you don't agree that future cash flows are a good way to value a business, that's fine. Not everyone is a value investor. For what it's worth, the market also doesn't believe you. Closed-end funds generally don't trade at NAV. Richard

This argument that capital gains shouldn't impact valuation makes no sense. The value of a business is the discounted value of its free cash flow. Suppose you were confident that Fairfax, without insurance operations, was able to reliably compound its book value at 1000% a year through investing. Saying, "that stock is worth book value" makes no sense because its future free cash flows are worth far more than that. It's irrelevant if you choose to value other companies in the industry on a sum of parts valuation. Given a choice between buying an index mutual fund at book value, and this "compounding 1000% every year" company at 4 times book value, I would take the latter every time. Richard

OK, stahley, I understand what you mean. Thanks!

I find this statement surprising from someone who seems to believe in a higher power. Almost all such people I've ever met seem to believe that in the end, the people who act according to what the higher power wants will end up in some wonderful place, and those who don't will end up in some bad place. So, what do you mean by this? The atheists eventually convert everyone, then everyone who believed in the higher power is fine, but everyone born after that is screwed? I'm really curious how you reconcile these two beliefs....

Stahleyp, one of the problems with your "if morality doesn't come from God, then it's arbitrary and can be completely ignored" argument, is that it doesn't solve the arbitrary morality problem, since it still suffers from the "infinite pile of turtles" problem. (Why doesn't the earth fall? Because it's on the back of a turtle. But why doesn't the turtle fall then? Because it's on the back of the turtle too.) With your morality argument, you're just adding a turtle. It's arbitrary for you or it's arbitrary for the God. If it's a good idea to ignore the fact that evolutionary development results in morality giving you happiness in one case, it's equally a good idea to ignore the fact that God is giving you you happiness in the other case. Both cases are equally arbitrary.

I'm actually curious about this. So, if you exclude "sell to a greater fool" as a reason for buying, and an estimate of future cash flows as a reason for buying, what is the reason for buying Tesla? I just want to understand what you're getting at.

I found this video pretty revealing. https://www.youtube.com/watch?v=9odAuzz6kB0 It's unclear how representative it is, since it's effectively anecdotal evidence. But I believe it happened, and I believe that the people passing by in the video don't think they are judging people by their skin color. It must be tough living in a world where, because of your appearance or your background, life is skewed against you. It must be tiring and frustrating. So, I could see why a certain subset of the population would try to take advantage of the system, since the system effectively constantly screws them. It doesn't justify it, but understanding the holes in the system make it easier to patch them up. (Being a single parent would be freaking hard. If that's considered a good outcome, it shows that their options basically suck.) It reminds me of John Scalzi's analogy -- being a white male is basically like playing a video game on the easy level. It doesn't mean that there aren't difficulties and it also doesn't meant that some playing on the hard level can't win. But many things are just easier.

I think the multiverse argument is reasonable, but I don't think you need it to posit life. If the universe has been around for an infinite period of time and there's a close to infinite or infinite number of stars and planets, a one in a trillion chance is going to happen eventually. A second way of refuting your argument is to take a million numbers. Randomly select 50 of those numbers. What's the odds that those numbers came up in that particular order? Well, it's incredibly small, much smaller than your 1 in a trillion. So is that a miracle? I don't think so. The problem is that you can't argue some outcome like that after it's happened, and say, "because that outcome has a low probability, something special must have happened". Basically, outcomes are constantly happening. Each one always has an almost infinitely small chance of it happening, yet it does because some outcome has to happen.

Yeah, you're right. Sorry. That wasn't a fair way to characterize you at all. My mental model of why someone becomes right wing and why someone becomes left wing has been in flux for the past few months. As a side-effect of that, I used an incorrect heuristic. Sorry.

Ok, this argument isn't even in the realm of making sense. The form of your argument is, "to survive, you must eat. Therefore, eating anything (cyanide, stop signs, airplanes, babies) is generally a good idea". The thing that amuses me the most is that you're one of the more right-wing people on the board, but this really sounds like an argument the pigs would make in "Animal Farm". I also disagree with the premise that there's no way to get what you want without hard work. It sounds like a very bleak life. I think maybe you want very different things that me.